NEW YORK — Cherokee Inc. said higher expenses offset growth in royalty revenue and led to flat second-quarter profits.

For the three months ended Aug. 3, the Van Nuys, Calif.-based licensing and brand development group reported net income of $3.3 million, or 38 cents a diluted share, compared with income of $3.3 million, or 39 cents, recorded during the same quarter last year. Royalty revenues increased 2.6 percent to $8.6 million from $8.3 million last year.

Worldwide retail sales of Cherokee branded merchandise, from which royalties are derived, increased 5.9 percent to $518 million in the quarter. The company also reported momentum in the Sideout brand, as its retail sales increased 22.1 percent to $32 million.

"Our business is expanding," Robert Margolis, chairman and chief executive, said in a statement. "The sales of our own brands continue to grow, both domestically and in the international marketplace."

In a separate development, Kyle Wescoat has been named chief financial officer of Cherokee, succeeding Carol Gratzke.

Last month, Cherokee penned an agreement with DIC Entertainment and Toys ‘R’ Us to create a merchandise line based on DIC’s new series, "Liberty’s Kids," which began airing Sept. 2. The products are planned to launch early in spring 2003.

"This most recent licensing arrangement is further affirmation of the direct-to-retail licensing model that we pioneered," Margolis said.

The firm said a 13.9 percent rise in selling, general and administrative expenses, to $2.9 million in the most recent quarter, is attributable to costs associated with Carrefour’s and Tesco’s launch of Cherokee branded merchandise and legal fees related to a pending arbitration.

Cherokee rolled out this spring in certain European countries with France’s Carrefour SA, the international distribution giant, and will be introduced this fall in the U.K. and Ireland with Tesco PLC.

In July, designer Mossimo Giannulli and Cherokee separately called for arbitration to settle a dispute over finder’s fee royalties from the Mossimo license with Target, which Cherokee negotiated. The case is slated to be heard in mid-October.

Under terms of a three-year licensing deal Cherokee brokered for Mossimo Inc. with Target Stores, Cherokee is owed a 15 percent finder’s fee on all licensing royalties paid to Mossimo Inc. by Target. Pending settlement, Mossimo has withheld its first-quarter payments to Cherokee.For the six months, net income extended 6.6 percent to $8.4 million, or 99 cents a diluted share, compared with income of $7.8 million, or 95 cents, reached in the first half of 2001. Royalty revenues rose 5.8 percent to $20 million from $18.9 million in the year-ago period. Worldwide retail sales grew 7.2 percent to $1 billion.

Wescoat previously served as cfo of Vans, the Santa Fe Springs, Calif.-based active and casual apparel and footwear company. He has over 20 years of senior financial management experience.

Gratzke will remain at Cherokee to work on special projects while promoting women’s golf as an executive officer and board member of the Women’s Southern California Golf Association.

"I am pleased to have a financial executive of Kyle’s caliber joining our team at this important time as we seek further growth and refine our brand portfolio strategy globally," Margolis said in a statement.

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