Cherokee Inc. (CHKE)

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Cherokee (CHKE)

Q1 2014 Earnings Call

June 13, 2013 4:30 pm ET

Executives

Kimberly Esterkin

Jason Boling - Chief Financial Officer and Principal Accounting Officer

Henry Stupp - Chief Executive Officer and Director

Analysts

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

James Fronda - Sidoti & Company, LLC

Jonathan Abodeely

Jason Gordon Stankowski - Clayton Partners LLC

Presentation

Operator

Greetings, and welcome to the Cherokee Inc. First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kimberly Esterkin of ADDO Communications. Thank you. Ms. Esterkin, you may begin.

Kimberly Esterkin

Thank you. Speaking today will be the company’s Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Jason Boling. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements.

Certain statements contained herein may contain forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. When used, the words anticipates, believes, expects, may, should and similar expressions are intended to identify such forward-looking statements. Forward-looking statements included in this conference call involve known and unknown risks and uncertainties that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

A further list and description of these risks, uncertainties and other matters can be found in the company’s Annual Report on Form 10-K for fiscal year 2013, and its periodic reports on Forms 10-Q and 8-K. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The company disclaims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events and developments.

This call also includes a discussion of non-GAAP financial measure, as that term is defined in Regulation G, including non-GAAP SG&A and earnings per share. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the company's website at www.cherokeegroup.com.

And with that, I’ll hand the call over to Cherokee’s Chief Financial Officer, Jason Boling.

Jason Boling

Good afternoon, everyone, and thank you for joining us today on the first quarter fiscal 2014 call. I will begin today's call by discussing our financial results for the quarter. I will then turn the call over to Henry Stupp, our Chief Executive Officer, to speak in further detail about our brands and our partners before we open up the call to your questions.

Turning to our first quarter results. Net revenues for the first quarter were $8.1 million, or up 7.2% from $7.5 million in the prior year quarter. The growth in revenues is primarily from increased revenues from Liz Lange and other Cherokee international licenses, while offset by a significant decrease in royalty revenues at Zellers due to their recent closing. In general, the Cherokee brand continues to see strong international growth. As I will discuss later, the growth at Tesco during the first quarter is not yet visible due to the recent relaunch. However, international revenues, particularly Asia and South America, for the first quarter 2014, excluding Tesco and Zellers, increased 31% over the prior year period. Specifically, revenues from China increased 46% year-over-year. Japan saw a 41% increase in revenues over Q1 2013. And revenues in South America increased 45% over the prior year period. Tottus in particular, our exclusive retail partner in Peru and Chile, showed outstanding results for the quarter with retail sales increasing 83% in Peru and 61% in Chile over the first quarter of fiscal 2013. Sales of women's clothing in Peru and footwear in Chile were strong drivers of these increases. Henry will provide further detail on the international progress later in the call.

Selling, general and administrative expenses for the first quarter totaled $5.4 million as compared to $4.2 million in the similar period last year. Included in this increase in SG&A for the quarter are $1 million of fees that we believe will not recur and are related to the identification and remediation of weaknesses highlighted in the company's 10-KA for the fiscal year 2013. These fees included audit fees, legal fees and consulting fees to evaluate Cherokee's control systems and procedures, perform SOX-related testing and compliance work and provide additional analysis around our tax provision, expense oversight and reconciliation analysis.

Excluding this $1 million of expenses, our SG&A would've been $4.4 million or 55% of revenues, an increase of approximately $250,000 over last year. This increase was primarily due to higher personnel expenses, offset by decreases in marketing, travel and recurring professional fees. We believe these expenses, which should not recur, make it difficult for investors to evaluate the underlying performance of the business. We believe that non-GAAP net income, excluding these expenses, and related tax effects, provides a useful measure of performance for the quarter, as it offers consistency and comparability with Cherokee's past financial performance, facilitates period-to-period comparisons and enables better comparisons with other peer companies. With that in mind, excluding these charges, we ended the first quarter with non-GAAP net income of $2.2 million or $0.27 per diluted share, compared to non-GAAP net income of $2.1 million or $0.25 per diluted share in the first quarter last year.

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