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Cherokee Makes the Most of Its Trademark

Business: After two Chapter 11 bankruptcies, the company finds success by licensing out its name to other manufacturers.

September 21, 1999|KATHLEEN O'STEEN | SPECIAL TO THE TIMES

VAN NUYS — Cherokee Inc., now closely tied with the Target chain, found success when it stopped making clothes and started licensing its brand name instead.

The company, which licenses the Cherokee and Sideout brands to other manufacturers and retailers, was recently sought out by MGM Entertainment for advice on how to launch its own licensing enterprise.

The company has come back from two Chapter 11 bankruptcies this decade to post net earnings of $2.2 million for the second quarter that ended July 31, up 67% from the same quarter last year. And now with its brand firmly entrenched and growing in the United States, Cherokee is focused on acquiring other brands and building its licensing domain abroad.

Share prices, however, are mired around $8 and have lost about 12% in value during the past year. The stock closed Monday at $8.13.

"These are tough stocks to get people excited about," noted analyst Jeff Garrison of Stonefield Josephson. "But Cherokee is exploiting the label as they should. All you have to do is look at what Starbucks has done.

"As a branded label, now you have Starbucks ice cream. The coffee you're served on a plane is Starbucks. There is a lot of expansion. That is what Cherokee is trying to do, and for that reason, it should be a good investment."

"We really believe the way Cherokee has gone," he added, "is the way of the future, especially for smaller-sized manufacturers."

Robert Margolis, the company's chairman and chief executive officer, said the stock is undervalued. This summer, the company's board of directors authorized a repurchase of as many as 1 million shares, or about 11.5% of its outstanding stock, as that stock becomes available.

"We want to see what a buyback does under the right conditions," Margolis said. The company began as a shoe manufacturer in 1973, then expanded its line to clothing for women and juniors.

In 1989, the company's underwent a leveraged buyout--incurring huge debt that eventually forced the company to seek bankruptcy protection in 1993.

"Even with a 10% to 12% net income, roughly $22 [million] to $25 million per year, we still couldn't service our debt," said Carol Gratzke, Cherokee's chief financial officer.

At the time the country was in a recession and the apparel industry was undergoing a revolution.

"Retailers were becoming manufacturers," said Howard Siegel, Cherokee's president of operations. "The whole value equation in retail was changing. The competition to get the right goods at the right price was much tougher."

With the rise of stores such as Target, Wal-Mart and Kmart, consumers could get better prices on products than they could find in traditional department stores.

"Cherokee went through a second Chapter 11 in 1994 and the company was on the verge of a Chapter 7 when the board asked Bobby [Margolis] to come back," said Gratzke.

Margolis, who had been with the company since 1981 and helped expand it from shoes into clothing, had left in 1993 to start his own company. When he returned as chairman and chief executive in 1995, the first thing he did was commission a consumer survey to see where the Cherokee brand stood.

That survey surprised Cherokee management: consumers placed Cherokee in the top 10 of apparel sportswear brand names. The decision was made to stop manufacturing--and to start selling the name.

"They capitalized on the best thing they had going for them, their name," said Richard Giss, an analyst for Deloitte & Touche LLP. "Even though the company was saddled with their financial problems, it had not impacted their product or market."

Cherokee stopped its manufacturing operations and Margolis struck a deal with Target in August 1995 to license the Cherokee name, a move that ultimately would turn around the company's fortunes.

"The world had changed in retail, and this way, the consumer was getting more value at a cheaper price," Margolis said.

And Cherokee, without the risk and responsibility of being a manufacturer, collected royalties on every item sold with the Cherokee name. Analysts say that licensing deals generally offer a 6% to 12% return on sales, as opposed to the 30% to 40% gross profits for manufacturers.

"The timing was fortunate for them because retailers at the same time were being pressured to be competitive from a price perspective," Giss said. "There was a long time when price was the only thing. What started happening was that people began to attach an importance to the value of labels."

Since Cherokee offers a direct license agreement, Target is free to determine the style and manufacturer of whatever they put the Cherokee name on--within certain quality guidelines.

"That's the beauty of our program," Gratzke said. "We believe they are smarter than we are. They know who their customers are, what they want and when they want it. We give them autonomy."

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