Cherokee Inc. said Tuesday that it hired Goldman, Sachs & Co. to investigate options for maximizing shareholder value, which could include a sale of the company.
The California-based licensor and brand manager said in a statement that it would not comment further until Goldman Sachs completes its analysis and its own board approves any transaction, "if that occurs." Investors praised the move by sending shares up 6.5 percent, closing at $34.50. The 52-week high is $48.76, while the low is $29.50.
Cherokee has licensing agreements with companies such as Target Corp. in the U.S.; Tesco in the U.K., Ireland, Asia and Europe, and Zellers in Canada. Eric Beder, equity analyst at Brean Murray, Carret & Co., said in a research note that a sale of the company was unlikely. He has a "hold" rating on shares of Cherokee.
In its most recent year-end period, Cherokee posted a 90 percent gain in earnings to $34.8 million, or $3.93 per diluted share, from $18.3 million, or $2.07, on sales that soared 79 percent to $76.6 million. Chief executive officer and chairman Robert Margolis, who owns 12.2 percent of Cherokee shares and was ranked fourth in WWD's list of the 10 highest-paid executives of an American vendor for 2007 at an estimated $8.8 million (including a $8 million bonus), is believed to be looking to monetize his stake in the company, according to Beder.
Beder said Cherokee lacks hidden value that will earmark it for an acquisition. "While we salute management for doing everything in its power to maximize shareholder value, we view the chances of a completed transaction as remote, at best, and the ability for the company to achieve a material premium beyond the current stock price as limited," Beder said. "We believe, for a number of reasons, that when Cherokee is viewed as a potential buyout or acquisition target, much of the luster of [the company] dissipates. We remain on the sidelines."
Recently, Cherokee has been exploring several more international opportunities in addition to its pre-existing licensing agreements with Tesco and Zellers, as a way of safeguarding it against the falling U.S. dollar. In October, the company announced an agreement with Arvind Mills Ltd., India's largest integrated textile company and retailer.Meanwhile, its sales relationship with Target Corp. is slipping. In 2000, sales to Target made up 66 percent of Cherokee's total revenue. That number is now down to 24 percent. A similar relationship with Zellers may also affect its takeover desirability, despite an indication of further diversification, Beder said.
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