Shares of Cherokee Global Brands were trading down $2.85, or 37 percent, to $4.90 in mid-day trading Friday after the company reported a surprise first-quarter loss and said it was seeking amendments to comply with certain covenants in its credit facility.
The net loss came to $3.3 million, or 25 cents a share, against earnings of $2.6 million, or 29 cents, in the same period a year ago. Excluding accounting, legal, integration and restructuring costs related to its acquisition of Hi-Tec, the loss on a non-GAAP basis would have been $893,000, or 7 cents a share, against adjusted net income of $3 million, or 34 cents, in the prior-year period. Wall Street’s consensus target had called for earnings of 13 cents a share.
Regarding its credit line violation, Cherokee said that on June 27 it obtained forbearance from Cerberus regarding the company’s failure to comply with certain covenants included in the Cerberus credit facility. Cerberus agreed that it will not exercise its rights or remedies under the Cerberus credit facility through July 7. The company is in advanced conversations with Cerberus and expects to secure an amendment.
“We are quite confident that we will reach an agreement regarding an amendment to the credit facility,” said Henry Stupp, CEO, on a conference call with analysts. “The covenant was more of a technical breach, which is being remedied and it related to mostly the timing of the cause of the acquisition.”
He added, “Cerberus has indicated that they will extend the forbearance period while we work through the terms of the amendment. And we remain confident that we will work through this, and we will be back on track sooner.”
Consolidated first-quarter revenues, including the contribution from Hi-Tec, were $11.1 million. On a year-over-year comparable basis, Cherokee Global Brand revenues, excluding Hi-Tec, were $5.2 million, a decrease of 51.4 percent from $10.7 million in the prior-year period. The year-over-year decline is largely due to the decrease in North America revenues related to the Cherokee brand as the company continues to transition to new wholesale licensees with Target’s move to discontinue selling the Cherokee brand.
Some of the decrease was offset by global revenue increases, particularly in Europe, Asia and South Africa as the demand for Cherokee-branded products continues to grow.
The loss reflected an increase in SG&A expenses to $10.2 million from $6.4 million in the prior year period primarily due to the inclusion of operating costs for Hi-Tec of $3.6 million, which includes accounting, legal, integration, and restructuring costs incurred during the first quarter.
Stupp noted that that the company has previously noted that SG&A expenses have been elevated relative to historical periods as a result of its integration activities and the infrastructure buildup relating to the introduction of apparel, accessory and outdoor product categories for Hi-Tec. A reduction of such expenses is expected during the remainder of the year.
Non-GAAP SG&A, which exclude certain accounting, legal, integration and restructuring costs, rose to $5.7 million from $5 million in the year-ago period. The increase is due to the transition to new U.S. wholesales licensees for the Cherokee brand. The switch from a DTR model to a wholesale model for the Cherokee brand is also causing the company’s financial performance to more closely reflect traditional retail seasonality with higher revenue and profit in the second half of the year. Traditionally, the first quarter was its largest revenue quarter.
Among its brands, Cherokee brand’s sales were $2.8 million, a decrease of 66 percent due to the wind down of its relationship with Target stores in the U.S. Stupp said that during the quarter, the brand’s licensees began distributing Cherokee products at regional and national specialty chains in addition to the e-commerce channel. The company remains confident that the Cherokee brand will reach 5,000 U.S. retail doors by the end of this calendar year.
Tony Hawk’s sales were $1.3 million, an increase of almost 7 percent due to continued growth in key international territories, including Canada. In addition to recent launches in Argentina, ongoing strength in the U.K., and planned expansion in South America and Europe, new U.S wholesale licensing relationships are expected to drive growth going forward.
“We’re especially excited about our expansion into additional distribution channels in the U.S., including specialty retail, Amazon.com, Walmart.com, and with national and regional retailers where the brand has historical been under represented,” said Stupp. “This newly expanded distribution will include additional categories that have been absent from retail for quite some time, including our recently signed Master Accessory Partner, and we’re in final contract discussions with potential licensees for full leg socks, underwear and sleepwear.”
At Flip Flop Shops, Q1 revenues were down 6 percent to $336,000 although same-store sales in the U.S are getting stronger with a year-to-date increase of 4.2 percent through June. An integrated monthly marketing campaign and promotional events calendar is helping drive growth, and product exclusives, such as Richmond’s Marvel Time Spider-Man style, are expected to drive engagement. Expansion is expected to come from its large scale franchisee partners and new partnerships. Opportunities continue around freestanding stores, its floating retail concept, and shop-in-shop concept with specialty retailers.
Hi-Tec’s revenues reached $6 million in the period, which include $1.7 million in revenues from its licensees and $4.3 of indirect product sales from distributors. In partnership with licensees, Hi-Tec is introducing an apparel and accessory program for men, women and children throughout Western, Central, Eastern Europe and Middle East, while expanding its core footwear businesses in the U.S., Latin America, and a “fast-growing footprint” in Asia.
In the U.S., Hi-Tec has executed license agreements “with two very established partners for apparel and accessories for the U.S. and Canada” with the details expected to be announced in coming weeks. Stupp said the new licenses will join 28 Hi-Tec, Magnum and Interceptor licensees around the world as well as over 50 distributors in over 100 countries.
“We also look forward to showing you details of our expanding distribution on major territories, which include national and regional department stores, market-leading retailers in the sport specialty channel, and major ecommerce retailers,” said Stupp. “As previously announced, we expect retail availability for new category introductions, including apparel and accessories to begin as early as the third quarter of fiscal 2018.”
In its Wear to Work segment, the company is in the process of securing major contracts for the Magnum brand for tactical, military, service industry construction footwear. Today, it has over 60 government contracts.
The company also owns Carole Little, Liz Lange, Everyday California, Sideout and 50 Peaks.
“In summary, fiscal 2018 is off to a good start,” said Stupp. “During the first quarter we further diversified our global points of distribution, and growth upon the awareness of our high equity brands through category expansion and new format initiatives. Our financial performance will increasingly reflect the benefits of this diversification across geographies, channels, retailers, and product categories.”
At the same time, Stupp said the company is focused on reducing corporate expenses with a focus on increased productivity, eliminating redundancies, and continued integration to leverage its global organization. Said Stupp, “We have a clear vision for our future and where we are taking our brands. The agility to move with the accelerating pace of retail and the ability to achieve success in a global scale as never before, and we remain confident in our proactive strategy.”
Photo courtesy Hi-Tec
