By Eric Smith
A second-quarter net loss and revenue decline didn’t appear to derail Cherokee Global Brands. The company beat Wall Street estimates and then saw shares jump 17 percent, or 15 cents, in midday trading Friday before moderating to low-double-digit growth later in the day.
The company on Thursday afternoon reported a net loss from continuing operations was $9.1 million, or 65 cents per diluted share, compared to a net loss from continuing operations of $4.8 million, or 37 cents per diluted share, in the prior year.
Revenues were down 10 percent for the second quarter, primarily due to the continuing transition from the company’s direct-to-retail licenses in the United States to wholesale licenses.
This was partially offset by growth in royalty revenues from the Cherokee brand and the Hi-Tec portfolio of brands. But as the company continues to restructure and rightsize business operations, Cherokee is banking that the company’s pledge to “think like a retailer” will serve as a differentiator in the marketplace.
“Not only are we able to maximize the product to marketing opportunities associated with each of our high equity brands, but we’re also able to create new brands where our capabilities and design, development and procurement of exciting new products for existing and new retail partners,” CEO Henry Stupp said on Thursday’s earnings conference call with analysts. “This has never been more relevant as retailers seek to balance national brand recognition with the margin benefits and differentiation inherent with private brand.”
In other words, Stupp said, Cherokee is “uniquely positioned to support private label initiatives,” and the company “firmly believes that the balance between private label and scalable established brands is the secret sauce needed to attract consumers.”
Another way Cherokee is thinking like a retailer is a renewed emphasis on brick-and-mortar, in part because of what the company views as an emerging shopping pattern of the next generation.
The company continues to see e-commerce as a focal point, but “there is also a return to the store particularly amongst Generation Z consumers looking for brand experiences which are legacy and heritage brand such as Cherokee, Hi-Tec and of course Tony Hawk are able to deliver,” Stupp said.
Stupp also noted that Cherokee will soon be announcing “new meaningful multiyear agreements with large-scale retailers that have tapped into our resources and product development infrastructures.”
“With our 360 degree platform, our new partnerships, we’ll benefit from our innovative design vision, our agile sourcing and market driven approaches and our ability to scale brands quickly and efficiently,” he added.
Cherokee is undergoing transformation across the organization which resulted in a 37 percent reduction in ongoing selling, general and administrative expenses and a 97 percent increase in adjusted EBITDA when compared to the prior year.
Restructuring efforts in Q2 were designed to improve organizational efficiencies, including eliminating redundant positions and unneeded overseas facilities. In addition, Cherokee Global Brands terminated various consulting and marketing contracts which resulted in a one-time charge of $5.6 million.
During the second quarter, Cherokee Global Brands also incurred $4 million of interest and other charges, of which $3.2 million was non-cash, resulting from the refinancing of the company’s credit facility. Other one-time items in the second quarter include a $0.6 million gain on the sale of the company’s Flip Flop Shops franchise operations.
“These changes helped in establishing a more streamlined organization that will enable the company to leverage on executive structure to operate and manage the business globally,” the company said. “On a trailing 12-month basis, the company has reduced its headcount by approximately 35 percent.”
Q2 revenues of $7.1 million were down 10 percent from $7.9 million in the second quarter of 2017, a year-over-year decline that largely reflects the transition of the company’s Tony Hawk, Cherokee and Liz Lange brands in the U.S. from a direct-to-retail model to new wholesale licensing partners.
The second quarter of the prior year also included Flip Flop Shops, which was sold on June 1 to the parent company of the footwear brand Bearpaw.
Revenues in the second quarter of the prior year from Flip Flop Shops and other terminated licenses were $2.9 million. Revenues from ongoing and new licensees increased 42 percent in the second quarter compared to the prior year.
Looking at the company’s performance in the first six months, revenues were $12.5 million, down $2.2 million from $14.7 million in the prior year. Net loss from continuing operations for the first six months of fiscal 2019 was $11.8 million, or 84 cents per diluted share, compared to $8.3 million, or 64 cents per diluted share, in the prior year.
Another big story for the company in Q2 occurred on August 3, when the company replaced the company’s credit facility and former lender with a new term loan and subordinated promissory notes. Incremental interest expense of $0.8 million was incurred during Q2 because of this transition and a non-cash charge of $3.2 million was recorded as a component of other expense to write off the remaining unamortized debt issuance costs of the previous loan.
Following the quarterly performance, the company narrowed guidance for the fiscal year ending February 2, 2019. Revenues are now anticipated to be in the range of $25 million to $26.5 million. Adjusted EBITDA is expected to be in the range of $8.5 million to $10 million. And SG&A run rate is expected to be around $16.5 million, a reduction of $8.9 million from fiscal 2018.
Photo courtesy Cherokee Global Brands
[author] [author_image timthumb=’on’]https://s.gravatar.com/avatar/dec6c8d990a5a173d9ae43e334e44145?s=80[/author_image] [author_info]Eric Smith is Senior Business Editor at SGB Media. Reach him at eric@sgbonline.com or 303-578-7008. Follow on Twitter or connect on LinkedIn.[/author_info] [/author]
