Cherokee Inc. (CHKE)

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Cherokee (CHKE)

Q2 2014 Earnings Call

September 12, 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

James Fronda - Sidoti & Company, LLC

Pankaj Chandak

Brian Guy Lancaster - Clayton Partners LLC

Presentation

Operator

Greetings and welcome to the Cherokee Inc. Second Quarter 2014 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Ms. Kimberly Esterkin. 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.

You can also find accompanying slides for today's call on Cherokee's Investor Relations website.

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 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 and uncertainties and other matters can be found in the company’s Annual Report on Form 10-K/A for the fiscal year of 2013, and in 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.

The most directly comparable GAAP financial measures and information reconciling non-GAAP financial measure 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 our second quarter fiscal 2014 conference 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, our partners, before we open up the call to your questions.

Turning to the second quarter results. Revenues grew 19% to $7.5 million from $6.3 million in the prior-year period, despite the negative impact attributable to foreign currency reductions.

This growth in revenues is primarily from increased revenues from our namesake brand at Target, Liz Lange, and other Cherokee international licenses, offset by a significant decrease of approximately $670,000 in Cherokee royalty revenues at Zellers Canada due to their early closing during the first quarter of fiscal 2014.

We expect the revenue decreases experienced as a result of the cessation of the Zellers Canada operations will be offset by further expansion of Target Canada, which began in March 2013. And Target Canada will continue to add locations through the remainder of calendar 2013.

The Cherokee brand continues to see strong international growth in local currency retail sales, despite foreign currency devaluations in several of our key markets, including Japan, South Africa and India, which have reduced our revenues by approximately $131,000 during the second quarter and approximately $200,000 year-to-date.

In South America, where there is increased economic development, revenues from Tottus, our exclusive retail partner in Peru, Chile and Colombia, showed outstanding results for the quarter, with retail sales increasing approximately 60% over the second quarter of fiscal 2013. We continue to see positive sales momentum in Asia with both Nishimatsuya and RT-Mart.

Selling, general and administrative expenses for the second quarter were $4.2 million or 57% of sales compared with $3.6 million or 58% of sales in the prior-year period. This increase is related to personnel costs that were provided to enhance our 360-degree approach with our partners, including Tesco, and increased amortization costs relating to the acquisition of Liz Lange and Cherokee uniform brands.

On a GAAP basis, net income for the second quarter was $1.9 million or $0.23 per diluted share, an increase of 19% compared with $1.6 million or $0.19 per diluted share in the prior-year period.

Operating income for the second quarter totaled $3.3 million versus $2.7 million in the same period last year. Operating margins for the quarter improved to 43% from 42% in the prior-year period.

For the quarter ended August 3, 2013, we recorded a tax provision of $1.2 million, which equates to an effective tax rate of 38.4% compared to $1 million or an effective tax rate of 39.1% recorded in the second quarter of last year.

Turning to our balance sheet and related metrics. Total cash and cash equivalents as of August 3, 2013, were $2.8 million, up from $2.4 million at the end of the first quarter.

Cash flow from operations totaled $3.5 million for the quarter versus $3.8 million for the prior-year period due to increases in accounts receivable relating to the revenue from both the Cherokee and Liz Lange brands, partially offset by decreases in payables.

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