Cherokee Hit by Sears Canada Bankruptcy

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Cherokee Global Brands is seeking new retail distribution in Canada for its Cherokee apparel in the wake of Sears Canada filing for bankruptcy protection, company executives told analysts as released its quarterly results Thursday.

Cherokee “read the writing on the wall” as Sears Canada struggled financially and has begun discussions with other large Canadian retailers about carrying the apparel, Cherokee’s Henry Stupp said. Cherokee launched Cherokee apparel through Sears Canada as a DTR last year.

The Sears Canada deal generated less than $1 million in annual royalty revenue for Cherokee, says Wunderlich Securities’ Eric Beder. In filing for bankruptcy in late June, Sears Canada said it would close 59 locations, including 20 of its 94 full-service stores.

“We are in a bit of standstill” with Sears Canada and “we have been introducing ourselves to other large retailers in Canada,” Stupp said. “We are letting licensees expand their territory with other retailers in Canada. Ultimately we are disappointed with the turn of events at Sears Canada.” Cherokee also will consider new DTR agreements in Canada, says a company spokeswoman.

Meanwhile, Cherokee brand revenue plunged 66% in fiscal Q1 ended April 29 to $2.8 million.  The year-ago quarter included royalty revenue (about $6 million – $7 million, according to Beder) from Cherokee’s long-running relationship with Target, which ended January 31.

Cherokee is working to build business for the brand with regional, mid-tier and mass retailers in the U.S., Stupp said. Cherokee apparel will available through 5,000 stores globally by year-end, he said.

Meanwhile, Tony Hawk brand revenue increased 7% to $1.3 million amid its first entry into the Argentina market and plans for expanding in Europe later this year. Tony Hawk apparel continues be sold through Kohl’s, and Cherokee has expanded it to Amazon and Walmart.com as well as other retailers, Stupp said. The company recently signed a master licensee for Tony Hawk in fashion accessories and is in discussions with potential sleepwear and underwear licensees, Stupp said.

Cherokee also has agreements for bringing apparel into the U.S. for the first time under is newly acquired Hi-Tec brand. Hi-Tec, largely known for its footwear, already has the Batra Group as an apparel licensee for Europe. Cherokee signed agreements for Hi-Tec and 50 Peaks (another brand previously owned by Hi-Tec) with Tharanco (men’s and women’s outdoor crossover apparel) and Interbrand (socks, gloves, hats). The Hi-Tec apparel will target mid-tier and above department, sporting goods, outdoor and specialty retailers, while 50 Peak is aimed at mass merchants, says a Cherokee spokeswoman.  The apparel will start sales in early 2018.

With the addition of apparel in the U.S., Hi-Tec and its two other brands – Interceptor and Magnum – have 30 licensees. Interceptor has an exclusive footwear agreement for the U.S. with Walmart where sales of the brand increased 30% from a year ago, Cherokee executives said.

Overall, Cherokee swung to an $893,000 net loss from a $3 million profit a year earlier as revenue increased 4% to $11.1 million. Royalty revenue slid to $6.8 million from $10.6 million. Meanwhile, Cherokee reached a forbearance agreement with lender Cerberus Business Finance on its credit facility after violating a covenant governing the timely filing of financial reports, including its 10K, which was delayed as it sought to include Hi-Tec’s financial results. Cherokee signed the credit agreement with Cerberus last fall to help fund its purchase of Hi-Tec.

Contact:

Cherokee Global Brands, Jason Boling, Chief Financial Officer, 818-908-9868