Cherokee’s 4th-Qtr. Earnings Drop

Lower revenues, payments to former CEO erode bottom line.

Declining royalty income and payments to former chairman and chief executive officer Robert Margolis pulled Cherokee Inc.’s fourth-quarter profits down to the breakeven point.


Net income for the three months ended Jan. 29 fell to $44,000, or zero cents a diluted share, from $3.1 million, or 35 cents, in the year-ago quarter. Royalties, Cherokee’s sole source of revenue, declined 2.7 percent to $7.4 million from $7.6 million.


The reduction in the company’s bottom line was principally due to a tripling of selling, general and administrative expenses to $7.3 million from $2.4 million. Of the amount in the most recent quarter, $5.1 million involved payments to Margolis, including a bonus of $1.8 million, a severance payment of $2.3 million and costs tied to the accelerated vesting of stock options. Margolis left the firm in February.


Cherokee reported that royalties tied to the Cherokee brand’s license with Target Corp. amounted to $3.3 million, up 11.7 percent from $2.9 million in the prior-year quarter. That corresponds to 44.3 percent of total revenues, up from 38.6 percent a year ago. Full-year Target royalties fell 2 percent to $13 million from $13.2 million.


The company said it was continuing in negotiations with Target regarding the retailer’s assumption of about 220 Zellers’ leases in Canada. Zellers is the current licensee for the Cherokee brand in Canada.


Henry Stupp, ceo of Cherokee, said, “While I am disappointed with our fourth-quarter results, I believe that our recently enhanced brand marketing, creative and support services will stabilize and ultimately grow our existing business while we expand both our existing domestic and international business presence.”


For the year, net income declined 38.6 percent to $7.7 million, or 87 cents a diluted share, from $12.6 million, or $1.43. Royalties pulled back 5.6 percent to $30.8 million from $32.6 million.
In addition to Cherokee, the Van Nuys, Calif.-based firm owns the Sideout and Carole Little brands.