Cherokee Inc. (CHKE)

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Cherokee (CHKE)

Q3 2014 Earnings Call

December 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

Presentation

Operator

Greetings and welcome to the Cherokee Third 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. 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 can 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/A for fiscal year 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 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 our third 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 and our partners before we open up the call to your questions.

Turning to the third quarter results, revenue of $6.7 million was on par with Q3 fiscal 2013. We increased revenue due to the acquisitions of Liz Lange and Cherokee School Uniform brands, combined with organic revenue growth from several of our Cherokee licensees, particularly in South America and Asia. The revenue increases associated with the acquisitions and general health of our licensees offset significant revenue declines related to both Zellers Canada of approximately $525,000 and the negative impact related to our success with Target U.S., where we moved to the next lower tier of royalty rates.

In other words, even though Cherokee retail sales at Target U.S. once again grew for the quarter, there was, as expected, a negative revenue impact of approximately $400,000 as the royalty rate declined. Additionally, there was $122,000 negative impact attributable to foreign currency devaluations in several of our key markets including Japan, South Africa and India. We expect the revenue decreases experienced as a result of the secession of Zellers Canada operations will be offset by further expansion of Target Canada, which began in March 2013.

Selling, general and administrative expenses for the third quarter were $4.1 million or 61% of sales compared with $3.4 million or 51% of sales in the prior year period. This increase is related to personnel and development costs required for further -- to further maximize the 360-degree licensing model as we added to our infrastructure in anticipation of further growth in fiscal 2015, including the launch of Cherokee-branded adult products at target.com and the expansion of our brand portfolio in new territories.

For the 9-month period, sales increased to $22.2 million from $20.6 million, while non-GAAP SG&A increased to $12.8 million from $11.2 million, representing 58% and 55% of sales, respectively.

The increase in costs related to infrastructure was partially offset by decreases in costs relating to marketing and travel. We continue to prudently monitor all expenses while ensuring that we are establishing a framework for future success with all of our brands and all organic growth opportunities.

Net income for the third quarter was $1.6 million or $0.19 per diluted share compared with $2.1 million or $0.25 per diluted share in the prior year period.

For the 9 months ending November 2, 2013, and October 27, 2012, non-GAAP net income was $5.7 million and $5.8 million, respectively. Non-GAAP EPS for the same periods were $0.67 and $0.68, respectively.

Operating income for the quarter totaled $2.6 million versus $3.3 million in the same period last year. Operating margins for the quarter were 39% as compared to 49% in the prior year period.

For the quarter ended November 2, 2013, we recorded a tax provision of $900,000, which equates to an effective tax rate of 37.6% compared to $1.2 million or an effective tax rate of 36.4% recorded in the third quarter of last year.

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