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Debt Load Could Derail Cherokee’s Longevity

Shares of Cherokee Inc. tumbled in recent weeks after the company announced it could face the prospect of bankruptcy in a June 14 earnings report. Since making the announcement, the company’s stock dropped a total of 31 cents, or 36 percent, to close at 55 cents on July 3. Shares have remained below the $1 mark for most of that period, putting the company in danger of being de-listed from the Nasdaq. The Sherman Oaks apparel brand licensing company, which conducts business as Cherokee Global Brands, has $49.1 million in total liabilities, according to a recent filing with the Securities and Exchange Commission. In a quarterly filing, the company stated that its debt issues have raised “significant doubt as to the ability of Cherokee Global Brands to continue as a going concern.” Cherokee’s primary debt-holder is New York private equity firm Cerberus Capital Management. David King, an analyst with Roth Capital Partners that covers Cherokee, downgraded the company from “Buy” to “Neutral” in a June 15 note. “Cerberus issued a notice of default as expected, thereby subjecting the company to higher borrowing rates,” King wrote. “We are lowering our rating to neutral, pending resolution of ongoing negotiations with Cerberus.” Despite the lower rating, King pointed to better-than-expected quarterly earnings of $5.4 million as an indicator of the company’s stabilizing fundamentals. Roth Capital had estimated earnings of $5.2 million for the quarter ending May 5. King noted the 58 percent year-over-year growth of Cherokee’s Hi-Tec brand portfolio as a key revenue driver. Last year, Cherokee reported a net annual loss of $45.6 million, reflecting a $35.5 million impairment charge stemming from “significant changes to the company’s cash flow projections based on recent experience.” In the note, King highlighted several risks for the company going forward, including its expiring license agreements, increased consumer e-commerce spending and questions about the long-term stability of its licensing partners and fashion retailers. In a move to cut costs, Cherokee announced the sale of its Flip Flop Shops retail chain to footwear manufacturer Bearpaw Holdings LLC for an undisclosed amount. Cherokee originally acquired the brick-and-mortar Flip Flop Shops franchise in 2015. It plans to use the proceeds from the sale to pay down debt.

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