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Cherokee Stitches Together Plans for New Headquarters

Despite the financial setbacks it has faced the past few years, Cherokee Inc. will move into a new corporate headquarters next month as it aims to revamp its brand. The Van Nuys-based company licenses, markets and trademarks apparel, accessories and footwear. Cherokee clients include North American retailers such as Target and T.J. Maxx, as well as international companies such as Tesco and Zellers. The company currently employs 22 people and has a market value of $111 million, as of Nov. 2. Cherokee CEO Henry Stupp says the new office — located just a few miles from the company’s current building — marks another step in Cherokee’s growth and development strategy, which also has included leadership changes and international expansion. It also helps improve Cherokee’s image, as the company aims to attract investments from stakeholders, he said. “The new office will allow us adequate space to showcase our brand and our product,” Stupp said. The move comes as Cherokee works to improve its financial position and reposition and market its brand — endeavors that often prove challenging and costly, especially in an economy where consumer confidence is low and retail spending is down. In its second quarter, ended July 30, the company reported net income of $1.7 million, or 20 cents per share, a 32 percent decrease from $2.5 million, or 28 cents a share, in the year-ago period. During the same period, royalty revenue, the company’s sole revenue source, fell 11 percent to $6.7 million from $7.5 million a year ago. For the company’s fiscal year, ended January 2011, revenues slid six percent to $30.8 million from $32.6 million. During the same period, expenses increased 52 percent from $10.8 million in 2009 to $16.4 million in 2010. Cherokee stock has traded in a 52-week range of $11.39 a share to $20.72 a share. (The data is current as of Nov. 2) Ryan Fuhrmann, portfolio manager, investment writer and president of Indianapolis, IN-based Fuhrmann Capital, has followed Cherokee’s financial performance for some four years. Although the company is attempting to reenergize its business, it likely will take about a year or so before the company will see any results, Fuhrmann said. Up for the Challenge Stupp joined Cherokee in August 2010, following the retirement of former CEO Robert Margolis. In stepping into the executive role, Stupp said he was aware of the challenges he faced in implementing his new vision for the company, including expanding global platform, introducing new product categories and growing top line revenue. Margolis’s exit was costly to Cherokee. Stupp now shoulders the burden of seeing that the company repays a $10 million loan it received from U.S. Bank as a means to repay financial obligations to Margolis, some of which were included in his executive compensation package, public filings show. Under his employment contract, Margolis was entitled to a lump sum payment of $2.3 million, a $1.8 million final annual performance bonus and $7.3 million in promissory notes to affiliates of Margolis, filings show. To date, the company has repaid about 25 percent of the bank loan, Stupp said. Operating income, meanwhile, has shrunk. In the most recent second quarter, Cherokee reported its operating income fell about 35 percent to $2.7 million from $4.1 million in the same period last year. Stupp maintains that the company is still profitable enough to invest in expanding the brand. “Operating income has dipped, but we’ve also made some changes” to the company’s general expenses, Stupp said. “The change (in compensation) from the former CEO to myself resulted in a significant drop to our selling, general and administrative (expenses), so we were able to take that amount and plug it into the investment of the brands.” According to the fiscal 2011 proxy statement, Margolis earned a base salary of $804,000 in 2011. Combined with stock options, non-equity compensation and other compensation entitlements, the total value of his 2011 compensation package was about $5.3 million, the proxy shows. Stupp’s 2011 base salary was $144,000. His 2011 total compensation package was valued at $1.3 million. Moving Forward To usher the company into the future, Cherokee is upgrading its headquarters, and the new 10,000-square-foot space is a departure from the darker, industrial building it has called home for more than 10 years. More specifically, Cherokee is shedding excess warehouse space — which Stupp said is virtually useless — for an open floorplan that caters to the company’s office needs while offering a steady stream of natural light. Cherokee will rent a floor in the office building located at 5990 Sepulveda Blvd. for about $20,713 per month for the first year, public filings show. That’s more than the company paid for its current 14,700-square-foot office, which rented for $12,500 per month. However, Stupp said the extra cost for the new space is minimal, as it includes utilities and one month of free rent per year, a feature not included in the old headquarters. Along with a new headquarters, Cherokee also has made it a priority to improve the company’s visibility and marketing strategies. On Sept. 22, Cherokee held the first annual “Cherokee Experience” Analyst/Investor Day in Minneapolis, Minn., which showcased the company’s retail platform. The event was attended by more than 120 guests and offered industry analysts and current and prospective shareholders a preview of Cherokee’s future vision of the brand. Stupp said one of Cherokee’s larger institutional shareholders increased its ownership position after the event. He declined to name the shareholder and would not disclose the amount the company invested, pending the release of the fiscal 2012 proxy statement. But the CEO said the results have been encouraging: “I believe right now the relationships are very positive and collaborative. We’re fully engaged on both sides.” Cherokee also is making headway in strengthening relationships with its retail partners, who were strained during the recession. “We weren’t doing enough to service the relationships, invest in our brand, address changes that were taking place in the market and leading the charge,” Stupp said. The company has since been proactive by expanding its product offerings and introducing new marketing and advertising technologies, such as iPad applications, to help drive sales.

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