Apex Global Brands (formerly Cherokee Inc.) on Tuesday lowered its fiscal year outlook “due to economic uncertainty, Brexit and the impact of a weakened British pound sterling and euro.”
The company reported a net loss for the fiscal second quarter ended August 3 of $1.3 million, narrowing its loss of $9.1 million the same quarter a year ago. Earnings per share of (8) cents missed estimates by 10 cents.
“The second quarter 2020 marks our first official quarter reporting as Apex Global Brands,” said CEO Henry Stupp. “We remain focused on leveraging our infrastructure to maximize our platform and portfolio across multiple retail channels. In addition, we continue to significantly improve our operating efficiency and reduced our SG&A by 23 percent in the second quarter. We are adding new licenses and product categories at an even faster pace than ever before, as we expand APEX’s global reach. We are also establishing new revenue streams for our current portfolio, diversifying across geographies, customers, categories and consumer touchpoints, in addition to introducing our design services arrangement to numerous retailers, which is performing well.”
Stupp continued, “Longer term we are optimistic that the actions we are taking and the portfolio we are building will result in a bigger, stronger and more profitable APEX. In the near-term, however, we face some challenges consistent with the entire retail industry – namely, a softening U.S. retail environment and uncertainty surrounding Brexit – which have resulted in lower top-line growth. The actions we’ve taken to stabilize our financial position and refresh our business model have put us in a position to continue to expand the reach of the brands we own, the brands we create and the brands we elevate for others.”
Revenues were $5.6 million in the second quarter, a decrease of 21 percent from $7.1 million in the prior year. This year-over-year decline in revenue largely reflects decreases in the company’s Cherokee and Hi-Tec royalties in Europe, and the non-renewal of the company’s Cherokee license in South Africa at the end of Fiscal 2019. Economic uncertainty related to Brexit continues to impact several of the company’s European licensees. The strong U.S. dollar in relation to the British pound sterling and euro reduces the dollar value of the company’s European royalty revenues. Decreases in revenues were partially offset by revenues from the company’s new design services agreement with Walmart China. On a year-to-date basis, revenues for the first six months of Fiscal 2020 were $10.7 million, compared to $12.5 million in the prior year, a decrease of 15 percent.
Subsequent to the end of the second quarter, Apex Global Brands announced several brand developments. In August, Everyday California® launched at Tiendas Chedraui, one of the largest retailers in Mexico. Chedraui stores will carry an expanded assortment of Everyday California® men’s, women’s and children’s apparel, accessories and casual footwear beginning this fall.
APEX also announced the expansion of the Tony Hawk® brand through the addition of several new global licensing agreements this August, which range in categories from little and big boys’ clothing to young men’s and men’s clothing and accessories.
In September, APEX announced the continued expansion of the Hi-Tec® and Magnum® brands through new licensing and distribution partners in the United States, China and Korea.
The new license and distribution agreements for Hi-Tec®, Magnum®, and Tony Hawk® are expected to add incremental full-year revenue of $1.25 million – $2.50 million starting in Fiscal 2021. Additionally, the company is in the process of securing and expanding its distribution for these brands in India, China, Japan and South Korea plus the further expansion of its Cherokee® brand in Europe and Asia.
Operating and Non-operating Expenses
Selling, general and administrative expenses, which comprise the company’s normal operating expenses, were $3.1 million, compared to $4.0 million in the second quarter of the prior year. The $0.9 million, or 23 percent, year-over-year decrease reflects the positive impact of the company’s restructuring efforts, which have resulted in reduced spending for payroll and general operating costs. The company also reduced the size of its Board of Directors, and board members now receive their compensation in common stock.
On a year-to-date basis, selling, general and administrative expenses also saw significant declines, with SG&A totaling $6.9 million for the first six months of Fiscal 2020, down 17 percent from $8.3 million in the prior-year period.
The company’s other operating expenses include non-cash charges of $0.8 million for stock-based compensation and depreciation and amortization and $0.1 million for business acquisition and integration costs. In the second quarter of the prior year, these charges totaled $5.5 million primarily as a result of restructuring charges.
Interest expense was $2.3 million in the quarter, which includes $0.6 million of non-cash charges for deferred financing costs. In addition to ongoing interest payments, the second quarter of the prior-year also included $0.8 million of interest payments and $3.2 million of non-cash charges related to refinancing the company’s former credit facility.
Operating income was $1.6 million for the second quarter of Fiscal 2020 compared to an operating loss of $2.4 million in the second quarter 2019. Operating income during the first six months of Fiscal 2020 was $2.2 million, compared to an operating loss of $2.6 million in the first six months of the prior year.
Net loss from continuing operations was $1.3 million in the second quarter of Fiscal 2020, or a loss of $0.08 per diluted share, on 16.2 million shares outstanding, compared to a net loss of $9.1 million, or a loss of $0.65 per diluted share, on 14.0 million shares outstanding, in the second quarter of the prior year.
Net loss from continuing operations for the first six months of Fiscal 2020 was $3.5 million, or a loss of $0.22 per diluted share, on 15.8 million shares outstanding, compared to a net loss of $11.8 million, or a loss of $0.84 per diluted share, on 14.0 million shares outstanding, in the prior year.
Adjusted EBITDA decreased to $2.5 million for the second quarter, compared to $3.1 million in the prior year. This decline was due primarily to lower revenues from the company’s existing licensees in Europe and the non-renewal of the Cherokee® brand South African licensee, offset by the decline in selling, general and administrative expenses. Adjusted EBITDA in the first six months of Fiscal 2020 decreased to $3.7 million, compared to $4.1 million in the first-half of Fiscal 2019.
At the end of the second quarter, August 3, 2019, the company had cash and cash equivalents of $1.1 million. The company’s current cash balance is approximately $2.2 million. Outstanding borrowings under the company’s term loans were $44.5 million at August 3, 2019, including $1.4 million reflected as a current obligation.
Fiscal 2020 Outlook
The company is updating its guidance for the remainder of its fiscal year ending February 1, 2020, to account for the continuing negative impact on its licensees’ revenues due to economic uncertainty, Brexit and the impact of a weakened British pound sterling and euro. The company has also taken steps to further reduce its selling, general and administrative expenses.
- Full year revenues are now anticipated to be in the range of $23.0 million to $24.0 million;
- Selling, general and administrative expenses are now anticipated to be in the range of $13.2 million to $13.7 million;
- Adjusted EBITDA is now expected to be in the range of $9.8 million to $10.3 million.