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Stable Business Model Gives Cherokee Brand Awareness

Stable Business Model Gives Cherokee Brand Awareness CORPORATE FOCUS By SHELLY GARCIA, Senior Reporter You might expect that news of a decline in sales of its products at its largest retail account would set Cherokee Inc.’s stock to falling. But within days of the company’s announcement, Cherokee’s share price hit a 52-week high, and so far it has pretty much remained at that level. The reasons are varied, but much of the explanation lies in Cherokee’s business model. “It’s a very lean organization, well run, extremely profitable,” said J.P. Mark, president and senior equity research analyst at Farmhouse Equity Research LLC in Portsmouth, R.I. “They’ve got long-term contracts with these customers and the licensing deals are very stable, and they’re very well put together.” Van Nuys-based Cherokee licenses and markets brand names including Cherokee, Sideout and House Beautiful to retailers such as Target Stores, May Department Stores Co. and Mervyn’s. The stores then use the brands as their exclusive labels to market a variety of merchandise from apparel to footwear and home furnishings, and Cherokee receives royalties on those sales, typically based on a sliding scale. In its most recent quarter ended May 1, Cherokee announced that retail sales of its Cherokee branded products at Target had declined about 8 percent to $402 million for the quarter, compared to $438 million for the same period in 2003. Another large customer, Zeller’s, which licenses Cherokee in Canada, also saw a drop in sales for the period. Companywide in the quarter Cherokee earned $5.5 million or $0.64 per diluted share, on revenues of $12.2 million. That compares with earnings of $5.3 million or $0.63 per share for the same period last year. Soon after the announcement on June 9, Cherokee’s share price began to climb, reaching $25 before leveling off. On Thursday, July 1, shares in Cherokee closed at XX. Previously, the stock had been trading in the $23 range. But if Wall Street didn’t flinch at the news it is because Cherokee is seen as a bread and butter brand in spite of the softening. While Cherokee sales of women’s apparel were off, that was not the case for men’s, kids and footwear. Company officials also said they planned to turn around those declines. But just as important, in recent years Cherokee has added enough new licenses and retail customers to compensate for the decline at older accounts like Target. “We have a more diversified revenue base now than we ever have had,” said Russell J. Riopelle, Cherokee’s CFO. “We’re getting a fair amount of revenue from our international customers, and that’s going to offset some of the decline from Target and Zeller’s.” In addition to Target, May and Mervyn’s, Cherokee also counts among its customer accounts Canadian retailers Zeller’s and Carrefour, the world’s second largest retailer, Tesco, the largest retailer in the U.K. and Shanghai Bolderway in China. Several new licenses, House Beautiful and Carol Little among them, are slated to debut in the next two years May will carry the House Beautiful brand and Carol Little will begin appearing at retail at The TJX Companies Inc. stores, which include T.J. Maxx and Marshalls. Into China And Cherokee is expected to move into China with its Sideout brand in two years. “Cherokee licenses brands that yield stable earnings streams and has more growth opportunities than ever before,” wrote Stephen Andersons, an analyst with Sprott Securities Inc. in a recently released report initiating coverage of Cherokee. The report noted that Cherokee has become the 11th largest licensor brand in the world, with its brands accounting for some $2.7 billion in sales at retail. Also worth noting, Cherokee’s business model provides for lower royalty percentage levels as a stores’ sales volume in the brand increases. So even as sales at some stores declined, Cherokee’s income did not decline to the same degree. Analysts say there is little danger that Target will drop the brand either. “I think if Target decided not to renew, there are dozens of other people that would line up to get the Cherokee brand in the U.S.,” Mark said. Finally, Cherokee has been so profitable that the company has, in the past three quarters, issued dividends to its shareholders, creating added value rare for a small cap issue. “People are looking for a bit of a safe haven,” Mark said. “There’s nothing else like it out there. It pays great dividends. It’s a place where people playing in the small microcap market can get a good deal.”

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