A tax benefit allowed Cherokee Inc. to lift its first-quarter profitability despite declines in royalty revenues and operating income.
In the three months ended April 30, the Van Nuys, Calif.-based brand management and licensing company recorded net income of $3.3 million, or 38 cents a diluted share, 11.7 percent higher than the $2.9 million, or 33 cents, logged in the comparable 2010 period. A $2.2 million tax refund from the California Franchise Tax Board, based on a ruling favorable to Cherokee regarding its taxes for the fiscal years 2004 through 2008, added 14 cents to earnings per share.
Royalties, Cherokee’s sole source of revenue, declined 24.8 percent, to $6.9 million from $9.2 million, during the quarter. Operating income slid 25.2 percent to $3.6 million from $4.9 million.
Sales of Cherokee products in Tesco stores in the U.K. and other European markets dropped 47.1 percent to $59.9 million during the quarter, accounting for the majority of the reduction in royalties, the company said in its quarterly filing with the Securities and Exchange Commission. Sales of Cherokee products at Target stores rose 0.1 percent to $189.6 million, and revenues of the Carole Little brands at stores operated by The TJX Cos. Inc. dropped to $539,000 from $542,000.
In the SEC document Cherokee said that it is negotiating to move its Cherokee license for the Canadian market to Target from Zellers, its current licensee. Zellers has agreed to sell leasehold interests in about 220 stores to Target.
“Unless and until a new agreement is reached, sales in Canada during fiscal 2012 will be governed by the contract already in place with Zellers,” Cherokee said.
oyalties attributable to Zellers grew to $436,000 from $393,000 during the first quarter, a 10.9 percent increase.
“Now more than ever, we are actively engaged in laying a strong foundation that will stabilize and ultimately grow our business with our existing and future partners,” said Henry Stupp, chief executive officer of Cherokee. “We are confident in our strategic direction and based upon the positive reactions from our partners, we believe in our ability to execute on these plans.”
Stupp succeeded Robert Margolis as ceo of Cherokee in August