NEW YORK — Is Cherokee Inc. back in acquisition mode?
Based on some recent acquisitive activity, its strong third-quarter results and the large amount of cash held on its balance sheet, the tea leaves seem to be saying yes.
As reported, the Van Nuys, Calif.-based licensing company purchased seven trademarks once held by CL Fashions Corp. and will license the most valuable trademark, Carole Little, exclusively to Framingham, Mass.-based TJX Cos.
The move reunited the Carole Little and Chorus Line brands under the broker company’s umbrella after a disastrous merger and much-publicized corporate meltdown.
Cherokee chief financial officer Kyle Wescoat said the five-year deal with TJX allows the off-price retailer to produce Carole Little apparel and footwear anddistribute it through any of its store divisions in the U.S., Canada and Europe. TJX operates the T.J. Maxx and Marshalls chains in the U.S., the Winners chain in Canada and T.K. Maxx stores in Europe.
"Everyone knows Carole Little and what Carole Little has historically done," said Wescoat of the careerwear label that approached $400 million in sales during its late-Eighties heyday. "We think it’s a great platform for growth and we didn’t have to pay extraordinarily much [for the trademarks]."
Industry sources estimated Cherokee paid roughly $2 million for the labels, sold at a bankruptcy auction. Along with the Carole Little mark, Cherokee also acquired trademarks for Chorus Line sportswear, CL II plus-size careerwear, Molly Malloy misses’ dresses, Saint-Tropez West moderate dresses, Tickets denim dresses and junior sportswear brand All that Jazz. Cherokee is actively pursuing distribution opportunities for these labels, Wescoat said.
A TJX spokeswoman said products will arrive in stores in the middle of 2003. Carole Little is a "great brand to add to our stable and the small amount of private label business we do," she said.
In another telling move, as reported, Cherokee earlier this month licensed the Shanghai Bolderway Fashions Co. division of Guangdong Leaderway to introduce the Sideout label to the Chinese market.
Under terms of the 10-year agreement, Bolderway will market women’s, men’s and children’s apparel and accessories, and other categories under the Sideout label in China. It will also open a minimum of 150 retail locations, both company-owned and franchised, in the world’s most populous nation.All of this comes hard on the heels of a record third quarter, when Cherokee said that strong sales in Europe fueled its impressive bottom-line results.
For the three months ended Nov. 2, Cherokee said net income increased 11.8 percent to $2.1 million, or 25 cents a diluted share, compared with income of $1.9 million, or 23 cents, in the same quarter of last year. Royalty revenues for the quarter rose 9.5 percent to $6.1 million, compared with revenues of $5.5 million in the third quarter of 2001.
"During the quarter, we saw strong growth in Europe due to Tesco’s successful launch of the Cherokee brand," Robert Margolis, chairman and chief executive, said in a statement. "We believe sales of Cherokee-branded products in Europe are on track to approach $200 million in retail volume in their first year."
Margolis said last month that Cherokee is actively looking for brand acquisitions. Prior to its pickup of the CL Fashions trademarks, it hadn’t acquired a brand since its 1997 purchase of Sideout. This year, that business will do more than $100 million in midtier department stores, Margolis said.
Sideout licensees in the U.S. include the Mervyn’s division of Target Corp. and Bob’s Stores. Internationally, Forzani Group holds the license in Canada and Sport-Scheck GmbH in Germany, Austria and Switzerland. Sport-Scheck is a sporting goods and catalog retailer owned by Otto Versand, the majority owner of Spiegel Group in the U.S.
Selling, general and administrative expenses for the quarter grew to $2.4 million, or 39.4 percent of sales, compared with $2.1 million, or 37.8 percent of sales for the same period last year — driven by increased personnel and travel costs for the positioning of Cherokee in Europe, management bonuses and attorney fees related to the Mossimo arbitration. An arbitration panel on Nov. 11 ruled in favor of Cherokee Inc. in its dispute with Mossimo Inc. over finder’s fee royalties generated by Mossimo’s licensing deal with Target. Cherokee is entitled to a finder’s fee equal to 15 percent of Mossimo’s royalties as long as Target continues to license the Mossimo trademark.
As part of the interim award, the arbitration panel directed Mossimo Inc. to pay all monies owed Cherokee, plus interest, along with Cherokee’s legal fees. Cherokee said in a Form 10-Q filed with the Securities and Exchange Commission that it is moving to confirm the interim arbitration award.The Mossimo brand has been popular with Target shoppers, grossing an estimated $700 million in its first year alone.
For the nine months, earnings increased 7.6 percent to $26.1 million, or $1.24 a diluted share, versus earnings of $24.4 million, or $1.18, reported in the same period last year. Royalty revenues jumped 7 percent to $26.1 million, compared with $24.4 million in the same period last year.
Cherokee is also swimming in cash. As of the of end of the third quarter, the company held $7.2 million of cash and cash equivalents on its books, a 64.8 percent increase over the prior-year level.
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