Growth in international markets and from the acquisition of the Tony Hawk brand helped Cherokee Inc. offset declines in business with Target Corp.’s U.S. stores and post double-digit increases in profits and sales in the second quarter.
Sales of Cherokee products at Target’s U.S. stores fell 6.8 percent during the second quarter and were down 4.6 percent during the first half. Henry Stupp, chief executive officer of the Sherman Oaks, Calif.-based brand management firm, said Target in the U.S. “continues to experience some lingering effects of the data breach that occurred during December of 2013. While foot traffic is improving, it has not yet returned to prior levels.”
However, he said that much of the decrease in the last quarter was caused by a planned reduction of inventory at Target’s U.S. stores and that sales results have improved recently as inventory levels have risen.
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Meanwhile, the company is seeing growth in its Cherokee business with Target’s Canadian stores, and Stupp said he was optimistic about the strategies recently outlined by new management, both corporate ceo Brian Cornell and Mark Schindele, who last month was named president of Target Canada.
Stupp said Cornell’s recent endorsement of an emphasis on nongrocery businesses, including apparel and maternity, was a promising development for Cherokee’s business with the retailer, as were recent moves at Target Canada to lower prices, fine-tune inventory systems and expand assortments.
“Overall, we’re confident Target is going to have a strong back half of the year,” he told analysts during a conference call to discuss the results. “I think they’ve made a lot of positive changes.”
Cherokee’s sales in Target’s Canadian stores rose 48 percent during the second quarter and have more than doubled year-to-date.
In the three months ended Aug. 3, Cherokee’s net income grew 16.2 percent, to $2.3 million, or 27 cents a diluted share, from $1.9 million, or 23 cents, in the year-ago quarter. Revenues, nearly all attributable to royalties, were up 16.9 percent, to $8.8 million, from $7.5 million. Subtracting $1.2 million in royalties received from Kohl’s Corp. for its exclusive rights to the Tony Hawk brand acquired by Cherokee from Quiksilver Inc. for $19 million in September, royalties rose 0.8 percent, to $7.6 million, despite a lower contribution from Target on its Cherokee sales.
In addition to the improvement in Canada, Stupp noted strong growth for revenues in Asia, where its Chinese and Japanese licensees helped royalties expand 46.8 percent, to $932,000, in the quarter, and Latin America, where royalties rose 19.5 percent, to $795,000. Royalties from the U.K. and elsewhere in Europe slid 28.9 percent, to $291,000, as Tesco continued to cope with “the overwhelming challenges it continues to encounter in its core market,” Stupp commented.
U.S. and Canadian royalties grew 14.8 percent, to $6.1 million. Excluding royalties from Tony Hawk, international’s share of revenues grew to 38 percent of the total from 31 percent a year ago.
Stupp said Cherokee’s board had decided to discontinue the payment of cash dividends after distributing a final payment on Sept. 15. “Funds, instead, will be used to further our growth strategy, rapidly pay down debt and acquire additional brands,” he added.
Pressed to identify brands that might be pursued, Stupp said they would tend to be larger in size and bought under “opportunistic” conditions. He said the company opposed the idea of buying three or four brands in a short time span. “Brands are living, breathing entities that require a certain amount of time and attention to reinforce that emotional connection with the consumer,” he said.
Year-to-date net income expanded 64.2 percent, to $5.8 million, or 69 cents, on a 20.4 percent increase in revenues to $18.7 million.