Cherokee Global Brands on Thursday narrowed its guidance for the fiscal year 2019 after reporting third-quarter revenues declined 25 percent as the company continues to transition from its DTR licenses to new wholesale licensing partners in the United States.

This was partially offset by revenues from the company’s new product development and design agreement. The company has worked to restructure and rightsize its business operations, resulting in a $3 million, or 48 percent reduction in selling, general and administrative expenses for the quarter. Revenue generated from the company’s Hi-Tec brand portfolio grew $1.6 million to $8.6 million for the nine-month period, an increase of 22 percent compared to the first nine months of the prior year.

“This has been a very productive year for the company. Although it’s early, our licensees and retail partners are seeing a significant revenue opportunity for the Hi-Tec portfolio of brands as they introduce new categories into new distribution channels on a global scale,” said Henry Stupp, CEO. “Further, our more efficient structure is focused on maximizing the value we can deliver on brands we own, brands we create and brands we develop for new partners, which taps into the capabilities of our product design and development platform.”

Stupp added, “Looking to the remainder of fiscal 2019 and beyond, we intend to expand the reach of our brand portfolio through category growth, new territories, new design partnerships and new licensees. The scalability, relevance and strategic plans that have been established for our brands are leading us to be a more profitable and responsive global brand management company.”

Revenues

Revenues were $5.8 million in the third quarter, a decrease of $2 million, or 25 percent, from $7.8 million in the prior year. The year-over-year decline largely reflects the transition of the company’s Tony Hawk, Cherokee, and the Liz Lange brands in the U.S. from a direct-to-retail (“DTR”) model to new wholesale licensing partners. Revenues in the prior year quarter includes $2.4 million from non-renewed licenses and Flip Flop Shops, which was divested in June 2018. These declines were partially offset by revenues from the company’s new multi-year product development and design agreement in China. Revenues from relationships that existed in the third quarter of fiscal 2018 increased $0.4 million, or 8 percent, year over year.

Revenues for the first nine months of fiscal 2019 were $18.3 million, compared to $22.5 million in the prior year, a decrease of $4.2 million, or 19 percent. Non-renewed licenses and Flip Flop Shops represented $8 million of revenues in the first nine months of the prior year. These declines were partially offset by revenue increases for the Cherokee and Hi-Tec portfolio of brands along with revenues from the new product development and design agreement. Revenues from relationships that existed in the first nine months of the year increased $3.8 million, or 26 percent.

Operating and Nonoperating Expenses

Selling, general and administrative expenses, which comprise the company’s normal operating expenses, were $3.2 million, compared to $6.2 million in the third quarter of the prior year. The $3 million, or 48 percent year-over-year decrease, reflects reduced spending for payroll, professional fees, general operating costs and the elimination of temporary employees following the completion of the Hi-Tec integration. Selling, general and administrative expenses for the first nine months of fiscal 2019 decreased $6.9 million, or 37 percent, to $11.6 million from $18.5 million in the prior year.

During the second quarter of this fiscal year, the company incurred several one-time charges that affected its results for the first nine months of fiscal 2019. Restructuring charges and business acquisition and integration costs totaled $5.9 million, and the refinancing of the company’s previous credit facility resulted in $4 of non-cash and cash charges. These costs were partially offset by a $0.5 million gain on the sale of assets.

Profitability Measures

Operating income for the third quarter was $2.1 million, compared to an operating loss of $1.5 million in the third quarter of the prior year. The operating loss during the nine months of fiscal 2019 was $0.5 million, compared to a loss of $5 million in the first nine months of the prior year.

Net income from continuing operations was $0.1 million, or zero cents per diluted share in the third quarter of the current year, as compared to a net loss of $2.4 million, or $0.17 per diluted share in the prior year. The net loss from continuing operations for the first nine months of fiscal 2019 was $11.7 million, or $0.83 per diluted share, compared to net loss of $10.7 million, or $0.81 per diluted share in the prior year.

Adjusted EBITDA increased $1.1 million, or 68 percent to $2.6 million for the third quarter, compared to $1.6 million in the prior year. This improvement was due to the year-over-year decline in selling, general and administrative expenses. Adjusted EBITDA during the first nine months of fiscal 2019 increased $2.8 million, or 69 percent to $6.7 million, compared to $4 million in the first nine months of the prior year.

Balance Sheet

At November 3, 2018, the company had cash and cash equivalents of $2 million, compared to $3.2 million at February 3, 2018. Outstanding borrowings under the company’s term loan and subordinated promissory notes totaled $50 at November 3, 2018, net of debt issuance costs, with $0.8 million reflected as a current obligation. At February 3, 2018, all of the company’s long-term debt of $46.1 million was classified as a current obligation.

Fiscal 2019 Outlook

  • The company is narrowing its guidance for the fiscal year ending February 2, 2019 as follows:
  • Revenues are anticipated to be in the range of $25 to $26 million
  • Adjusted EBITDA is expected to be in the range of $9 to $10 million
  • SG&A is expected to approximate $16 million