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Cherokee Royalties, Profits Drop in Q2

Mervyns liquidation, tightening of lines at Target cited.

Lower sales at Target Corp. and the liquidation of Mervyns cut into Cherokee Inc.’s second-quarter royalties and pushed profits down nearly 30 percent.

In the three months ended Aug. 1, net income was $2.9 million, or 32 cents a diluted share, 29.1 percent lower than the $4 million, or 45 cents, registered in the 2008 period. Revenues, all in the form of royalties, dropped 23.2 percent to $8.1 million from the year-ago level of $10.5 million.

Howard Siegel, president, said royalties in the U.S. dropped $1.1 million “as a result of lower retail sales of our Cherokee brand due to the reduction of categories at Target and the absence of Sideout revenues due to the liquidation of Mervyns.” Some of this decline was offset by growth of Norma Kamali volume at Wal-Mart Stores Inc., a licensing deal put together by Cherokee, and growth in smaller markets.

“Although we expect that retail revenues may continue to be soft through the rest of this year,” Siegel said, “we believe we will benefit from the growing revenue streams of our Cherokee brand in Brazil, Chile, Peru and India, as well as our upcoming launch in Spain, along with the continued growth of Norma Kamali at Wal-Mart.”

Those programs and new accounts for Cherokee and Sideout are expected to result in increased revenues beginning next year, he said.

The company also announced that it had licensed Jem Sportswear of San Fernando, Calif., to manufacture and market men’s and boys’ knit tops under its Sideout brand. Although Cherokee is best known for its retail direct licensing model, Robert Margolis, chairman and chief executive officer of Cherokee, said the firm would work with wholesalers like Jem to service retailers “that do not have the economies of scale to manufacture their own licensed lifestyle product.”

Cherokee will pay a dividend of 50 cents a share later this month. “Unless we see a prudent and compelling acquisition opportunity or some other growth opportunity, we expect to continue a dividend policy commensurate with our earnings and excess cash availability as conditions permit and at the direction of the board,” said Russell Riopelle, chief financial officer of Cherokee.

For the first half of the year, net income declined 23.2 percent to $6.7 million, or 76 cents a diluted share, as revenues dropped 23.1 percent to $17 million. The company’s cash and cash equivalents dropped to $8.9 million on Aug. 1 from $13.7 million on Jan. 31.