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LICENSING—Mrs. Fields’, Other Licenses Sweet Deal for Cherokee

In its heyday, sportswear maker Cherokee Inc. had revenues of more than $250 million and 700 employees. Today the manufacturing facilities are gone, Cherokee’s employees number all of 16 and the company’s revenues last year were $28.2 million. So why is Robert Margolis, chairman and CEO of the Van Nuys-based company, smiling? “We’re changing the way people do business,” Margolis said. “It’s not such a big deal to us that there’s, quote, less people. It’s just a different approach to doing business and reaching the consumer with more value, and this is the beginning.” Cherokee several years ago re-engineered its business, scrapping its manufacturing operation in 1995 and setting up a licensing business in its place. Using brands it has acquired outright or brokering deals on behalf of other makers, Cherokee contracts with large retail chains that then manufacture their own exclusive lines under the brand names. The company began with its own brand and has since added a number of others Sideout activewear, Mossimo Inc. junior sportswear and low-fat diet program Pritikin among them. Most recently, Cherokee inked a deal to represent Mrs. Fields’ Original Cookies Inc. in its effort to take the brand into new product categories. “They have a very good track record and they can bring some major players to the party very quickly,” said Gary Talley, vice president of branded retail sales at Mrs. Fields’. “We are pretty much exclusively licensed with food products and they would be taking us a little further out of that arena into things such as bakeware, which are things we don’t have any expertise in.” Such an approach can free a company like Cherokee from the whims of the market, where one season’s popular styles can be the next season’s markdowns, but it carries its own risks as well. If a retailer doesn’t manage the brand well, it can lose its value. “You’re putting your future in someone else’s hands,” said Marty Brochstein, executive editor of The Licensing Letter in New York. Cherokee made the transition because, like a number of mid-sized makers, it found itself squeezed by a changing retail climate in which large chains are increasingly bypassing the middleman in favor of manufacturing their own goods. That way, stores can sell merchandise at lower prices without sacrificing their profit margins. “There’s a lot of good companies (who are manufacturing successfully) but, as retailers like Gap continue to develop their own product, billions of dollars are leaving the open market,” Margolis said. Retail consolidations and the growth of chains like Target Corp., Kmart Corp. and Wal-Mart Stores Inc. have flip-flopped the traditional distribution chain for everything from apparel to food. These mega-chains have so much buying power, they can command prices far lower than the typical wholesaler. And thanks to computerization, they also have far more data about consumer preferences than many of the wholesalers that once supplied them. As these retail chains have flexed their own buying power, they have left a number of manufacturers in their wake. Companies like Carole Little and Bugle Boy have in recent years shuttered their operations. Even giants like Levi Strauss & Co. and Tommy Hilfiger Corp. have seen sales and earnings decline. At the same time, licensing has grown into a multi-billion dollar business, accounting for $73.7 billion in sales last year, according to The Licensing Letter. Other estimates peg the business larger still. Officials at Cherokee, which found itself mired in Chapter 11 proceedings twice before shifting its business, believe that, as retail chains become even more powerful, mid-level makers will increasingly find they’ve been elbowed out of the distribution chain for consumer goods. “When Mr. Margolis saw the environment changing and retailers becoming manufacturers and manufacturers becoming retailers, it didn’t take a rocket scientist to figure that maybe our life as a wholesaler is going to be short-lived,” said Carol Gratzke, chief financial officer. What Cherokee can bring to the table for retailers is an expertise in branding, packaging and marketing. For other manufacturers interested in expanding their brands, the company brings a worldwide network of retail chains hungry for well-established monikers to help raise awareness and interest in their merchandise. Since first signing on with Target in 1995, the Cherokee line has been expanded to include a variety of women’s, kids’ and men’s goods. In fiscal 2001, Target sold $1.7 billion worth of Cherokee merchandise, yielding royalty fees of $19.3 million to Cherokee. Cherokee followed up its first deal with a number of others. The company purchased the Sideout activewear brand outright and licensed it to stores such as Mervyn’s. And last year, the company reached an agreement to license the Mossimo brand, which is also being sold in Target. At the same time, Cherokee has taken these and other brands, including teen apparel and accessories lines B.U.M. Equipment, Candie’s and Rampage, which are still doing their own wholesaling in the U.S., into international markets. Each deal is structured differently. With Mossimo, for example, Cherokee receives a finder’s fee, 15 percent of the royalties Target pays to Mossimo; other arrangements are devised as exclusive consulting agreements. Either way, the growing stable of properties has contributed to a steady increase in revenues and earnings for Cherokee. Royalty revenues have jumped from $19.3 million in fiscal 1999 to $24.7 million in 2000 and $28.2 million in 2001. Over that same period, net income has grown from $6.0 million to $8.0 million to $10.7 million in the most recent fiscal year. Cherokee officials say they have been approached by numerous companies interested in working with them, but a well-known brand does not necessarily make for a good licensing candidate. For instance, the company was approached by a manufacturer in the extreme sports arena, but concluded that the market was too narrow to build a licensed brand. And a deal with Metro Goldwyn Mayer fell through because the company’s sales revenue expectations limited the number of retailers who might pick up the brand, Margolis said. “We look for equities that have a high, unaided awareness and consumer-friendly brands like Mrs. Fields’,” said Margolis. A brand must also be relatively clear of licensing agreements that would restrict new deals, and it must be the kind of name that could be applied to a wide variety of product lines. Titleist, for example, a well-known name in golf equipment, would not carry much weight in other product categories. Still, officials say, there are plenty of names that offer good expansion potential, particularly those like Mrs. Fields’ and Pritikin, for which Cherokee is working on a vitamin and supplement line. “We really want to be talking to a lot of food companies because we feel that industry has consolidated so much, and their private label store brands are not as powerful,” Margolis said. “We also want to continue to focus on apparel brands and product for the drug industry. Those are the three industries where we feel there’s enough volume.”

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