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Thursday, Jun 1, 2023

Ramping It Up

With the purchase of the namesake brand of the most dominant skateboarder in history, Cherokee Inc. hopes to ride the American icon’s apparel line oversees. And the stakes for the Sherman Oaks brand licensing firm are high, as the $19 million paid this month for Hawk Designs Inc., founded by skating legend Tony Hawk, is the most Cherokee has paid for an acquisition in the firm’s 40 year history. “Tony has more than 25 million views on YouTube on a global basis,” said Cherokee Chief Executive Henry Stupp. “We were shocked by his global visibility and name recognition.” Cherokee, most famous for selling its namesake line at retail behemoth Target Corp. of Minneapolis, made the purchase from Quiksilver Inc., a Huntington Beach firm known for skate and surf apparel. In the United States, the Hawk brand is exclusively licensed to Kohl’s Corp. of Menomonee, Wis. Clothing and accessories are sold in 1,158 Kohl’s department stores and online, giving Cherokee a new and reliable source of licensing revenue. But internationally, no such licensing agreements apply, which means Cherokee can expand the brand without restrictions, something it has been up to with its core Cherokee brand of casual apparel and footwear. In the last 18 months, it has struck distribution deals in Indonesia, the Middle East, India and elsewhere. Most notably, the company renewed a distribution deal last year with European retail giant Tesco plc of Cheshunt, England and launched an online store on China’s largest e-commerce website, Tmall.com, owned by Alibaba Group Holding Ltd. of Hangzhou, China. Cherokee’s namesake brand is available in all its international markets, but the rest of its portfolio is still mostly domestic. Those expansions follow several years after Cherokee entered Russia, Japan, South America and other markets. In all, Cherokee now has distribution deals in nearly 50 countries. Hawk hasn’t wholly owned his line since selling it to Quiksilver in 2000. However, he receives undisclosed royalties and remains involved in management. He said he was eager to rev up international sales and personally approved the sale of the line to Cherokee. “I still have final approval over the direction of the brand,” said Hawk in a telephone interview with the Business Journal. “And as we look to re-launch the brand internationally, I’ll be more closely involved with the designs too. I have wanted to expand internationally the last five years, but it wasn’t really a big priority for Quiksilver.” Hawk has a strong following in the United States, but retail experts say it remains to be seen how far it will carry globally. “Clearly, the upside is overseas for this. That’s where you’re going to get any growth,” said Neil Stern, a senior partner at Chicago-based retail consulting firm McMillanDoolittle LLP. “For example, Kobe Bryant is bigger in China than the U.S., but I’m not sure if Tony Hawk has that kind of enduring power.” Worldwide distribution Stern also cautioned that even if Hawk catches on overseas, international apparel distribution outside of the U.K., Europe and other established markets is tricky. For example, Cherokee can have a new line quickly distributed in Europe by Tesco, but in large emerging markets such as Indonesia or India, it is more difficult. “It’s a smart move to get a name like that, but there are obvious risks because the way you market in each one of those countries is going to be different,” said Stern. “If you’re going to market in India, it’s going to be heavily fragmented.” Stupp said his company is aware of the difficulties marketing in some foreign countries will pose, and plans to implement a different strategy. “We know how to do business in these markets and one of the first decisions we made is to focus on more wholesale licensing rather than direct to retail,” he said. “For example, there is no retailer that commands more than 5 or 6 percent of the market in Brazil, so wholesale is the way to go.” The Hawk acquisition follows another major deal Cherokee closed near the end of 2012 – its acquisition of the Liz Lange maternity brand for $14 million, the company’s second largest buy. Liz Lange is available in Canada through Target, and in India after a November deal was struck with Mahindra Retail Pvt Ltd. to sell the brand at its flagship retail stores, Mom & Me. Also last year, the company struck a deal to market a new line of clothing under the label of former Victoria’s Secret model Alessandra Ambrosio. The brand has yet to launch, but Cherokee has plans to bring it to Brazil, the model’s birthplace. Among its other portfolio brands are Sideout, Carole Little, Saint Tropez-West and Teen Hearts. But despite the aggressive move toward international distribution and brand acquisition, last year was not overly successful for Cherokee financially. In its fiscal third-quarter earnings last month, Cherokee recorded a 25 percent drop in net profit to $1.6 million. Revenue was flat at $6.7 million. Year to date, the company has reported net income of $5.1 million on revenue of $22.2 million. But Cherokee’s performance has not really affected the share price, which has been relatively flat, closing at $14 on Jan. 22, which is only 6 cents higher than its price on the same day last year. James Fronda with Sidoti & Co. LLC in New York is the only analyst that covers the firm. He rates Cherokee the equivalent of a “buy,” but does not publish a target price. Fronda did not return calls or emails seeking comment. Stupp was largely dismissive about his company’s stock price, noting the company has had to ride out the weak economy and, most recently, the news that credit card information of more than 100 million shoppers was hacked through Target’s point-of-sale software. “It’s a long-term play for us. Stock is under pressure for a variety of reasons,” he said. “There’s nothing we can do about economic tapers, government shutdowns or security breaches with Target.” Still, Target remains the cash cow for Cherokee, with apparel in 1,797 stores in the U.S. and 124 stores in Canada. In total, Target royalty revenues represent more than 50 percent of Cherokee’s total royalty revenues. That percentage should fall, given Kohl’s exclusive arrangement to sell the Hawk brand domestically. (Target has an exclusive licensing deal with another action sports icon, Shaun White.) Stupp said Cherokee’s Hawk line in Kohl’s will act as a “friendly” competitor to Target’s White line. “We think there are still a lot of growth opportunities with Kohl’s as well.” Hawk had a slightly different take. “It’s important for both of us, but I wouldn’t call it a rivalry. I’m glad we’ve opened that door for more action sports celebrities to get into this marketplace,” he said. “There’s room for all of us.” Turnaround The recent moves by Cherokee, founded in 1973, follow a tumultuous history, including a 1993 bankruptcy and a decision in 2007 to retain New York investment bank Goldman Sachs Group Inc. to explore “strategic alternatives,” which could have included the sale of the company. That never happened. Ilse Metchek, president of the California Fashion Association, a Los Angeles trade group, said Cherokee has been a successful turnaround story. What’s more, she said, the brand can attain a much higher-end perception in foreign markets. “In the U.S., they are a downstairs brand. In Europe or Asia, they can be seen as a more mid-level or even upscale brand,” she said. “This is going to be an especially interesting purchase because I don’t know how much Tony Hawk means outside of United States, but he is an icon and Cherokee is definitely on the right track.” Stupp, who came to Cherokee in 2010, when the downhill slide was long behind, said the company has “more tailwinds now than we have had in years as a company.” For Hawk, the journey has been long and full of surprises. He said when the clothing line started out of a garage in Orange County he never expected things would get to where they are. “I don’t think we ever thought that big,” he said, laughing. “But over the last 10 years things have been great and I’m excited to go so big internationally.”

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