Cherokee Global Brands reported revenues declined in the second quarter ended July 29 due to the exit of the Cherokee brand from Target that were only partly offset by revenues from new licensing deals for Hi-Tec.

“Having weathered a few headwinds during the first half of fiscal 2018, we remain focused on fully realizing upcoming opportunities through our strategic business model,” commented Henry Stupp, chief executive officer. “The financial integration of our Hi-Tec acquisition and filing delays presented challenges; however, with the support of new additions to our accounting team we are well positioned to make clear progress against our strategic goals. We are actively pursuing organic growth through category and geographic diversification across our core brand portfolio. Along with our ongoing focus on operating efficiencies and productivity, these measures will accelerate our momentum in the back half of the year.”

Stupp added, “We’re taking a disciplined and determined approach to our multi-category expansion of the Cherokee brand in the U.S. with over 5,000 points of distribution anticipated by year end. In the meantime, we are encouraged by strong summer sell-throughs and the pick up in re-order activity as we head into the fall and holiday seasons.”

Stupp concluded, “International expansion for Cherokee and Tony Hawk and improvements to our go-to-market strategy for Flip Flop shops are on track. Our licensing revenues for Hi-Tec are meeting expectations and we are confident that our strong licensee base will deliver on our goal to build the Hi-Tec portfolio of high equity brands into a profitable full-family lifestyle assortment for years to come.”

2018 Second Quarter Financial Results
Consolidated second quarter revenues, including the contribution from Hi-Tec, were $14 million. On a year-over-year comparable basis, royalty revenues excluding Hi-Tec were $5.6 million compared to $8.5 million in the prior-year period. The year-over-year decline is primarily attributable to the decrease in North America revenues related to the wholesale transition of the Cherokee brand in the U.S. During the quarter, some of the decrease was offset by global revenue increases, particularly in Asia, South America and South Africa, as global demand for Cherokee-branded products builds.

Hi-Tec revenues totaled $8.3 million and included $5.9 million in indirect product sales related to distribution and government contracts as well as $2.4 million in royalty revenues stemming from new and existing licensing deals for the Hi-Tec portfolio of brands. Gross profit from Hi-Tec indirect product sales was $1.1 million and is inclusive of $4.8 million in cost of goods sold.

For the six month period of fiscal 2018, GAAP consolidated revenues were $25.1 million compared to $19.2 million in the prior-year period. Cherokee Global Brands revenues, excluding Hi-Tec, were $10.8 million compared to $19.2 million in the prior-year period.

GAAP selling, general and administrative expenses for the second quarter were $10.1 million, compared to $5.9 million in the prior-year period. GAAP SG&A for the second quarter of fiscal 2018 was inclusive of $1.8 million in operating expenses related to the integration of the Hi-Tec acquisition. For the six-month period, GAAP SG&A totaled $20.3 million compared to $12.3 million in the prior-year period.

Non-GAAP SG&A for the second quarter, which excludes the aforementioned Hi-Tec integration and certain accounting, legal and professional fees that the company believes are unlikely to recur totaled $8.3 million. This compares to $5.3 million in the prior-year period. For the six-month period, non-GAAP SG&A totaled $16.3 million compared to $11 million in the prior-year period.

GAAP operating loss for the second quarter totaled $1 million, compared with GAAP operating income of $2.5 million in the prior-year period. GAAP operating loss for the six-month period totaled $3.1 million compared with GAAP operating income of $6.8 million in the prior-year period.

Non-GAAP operating income for the second quarter was $0.8 million, compared with Non-GAAP operating income of $3.2 million in the prior-year period. Non-GAAP operating income for the six-month period of fiscal 2018 totaled $0.9 million compared with $8.2 million in the prior-year period.

GAAP net loss for the second quarter totaled $4.6 million, or 36 cents per diluted share, compared to GAAP net income of $1.5 million, or 17 cents per diluted share, in the prior-year period. For the six-month period, GAAP net loss totaled $7.9 million, or 61 cents per diluted share. This compares to GAAP net income of $4.1 million, or 47 cents per diluted share in the prior-year period.

Non-GAAP net loss for the second quarter totaled $0.6 million, or 5 cents per diluted share. This compares to Non-GAAP net income of $1.9 million, or 22 cents per diluted share, in the prior-year period. For the six-month period, non-GAAP net loss totaled $1.5 million, or 11 cents per diluted share. This compares to non-GAAP net income of $5 million, or 56 cents per diluted share in the prior-year period.

Adjusted EBITDA was $1.2 million for the second quarter, compared to $3.5 million in the prior-year period. For the six-month period, adjusted EBITDA totaled $1.9 million, compared to $8.9 million in the prior-year period.

At July 29, 2017, the company had cash and cash equivalents of $3.7 million, compared to $8.4 million at January 28, 2017.

Fiscal 2018 Outlook
The company is updating its previously issued guidance for the fiscal year 2018 ending February 3, 2018 to account for year-to-date performance and its outlook for the remainder of the fiscal year.

The company now expects gross profit for the full fiscal year to be in the range of $39 million to $41.0 million, which is inclusive of royalty revenues from the Hi-Tec brand portfolio of approximately $12 million and gross profit generated from indirect product sales of approximately $7 million. Adjusted EBITDA for the full fiscal year is anticipated to be in the range of $10 million to $12 million. Fiscal 2018 Adjusted EBITDA excludes an estimated $7 million in costs primarily related to the integration and acquisition of Hi-Tec and other professional and legal fees that the company believes are unlikely to recur.

The company’s guidance is based on current plans and expectations and is subject to a number of known and unknown uncertainties and risks, including those set forth under the company’s safe harbor statement below. This forecast is made as of the date of this release, and company undertakes no obligation to update or amend this guidance whether as a result of new information, future events or otherwise.

Credit Facility With Cerberus
As of July 29, 2017, the company was not in compliance with certain financial covenants set forth in the Cerberus Credit Facility, namely the leverage ratio and the fixed charge coverage ratio. The company is working with Cerberus to resolve this non-compliance.

The company’s fashion and lifestyle brands include Cherokee, Carole Little, Tony Hawk Signature Apparel and Hawk Brands, Liz Lange, Everyday California, Sideout, Hi-Tec, Magnum, 50 Peaks, Interceptor and Flip Flop Shops, a leading franchise retail chain.

Photo courtesy Hi-Tec