Apex Global Brands Inc
Q3 2015 Earnings Call Transcript

Published: 10 Dec 2014

[Operator:]

Greetings and welcome to the Cherokee Inc. Third Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host today, Kimberly Esterkin. Please go ahead.

[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 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 and uncertainties and other matters can be found in the Company's Annual Report on Form 10-K for fiscal year 2014. 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 earnings release is posted on the Company’s website at www.cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee's Chief Financial Officer, Jason Boling.

[Jason Boling:]

Thank you, Kim. Good morning and thank you for joining us today. We’re pleased to report that revenues for the third quarter increased 30% to $8.7 million, compared to $6.7 million in the prior year period. The increase in revenues was primarily due to the revenues from Tony Hawk Signature Brand as well as continued strong organic revenue growth from Cherokee branded product in Canada, Latin America and Asia. For the first nine months of fiscal 2015, revenues increased 23% or approximately $5.2 million to $27.4 million. Selling, general and administrative expenses increased 20% during the third quarter to $4.9 million or 56% of sales, demonstrating the increased leverage of our business model, when compared to $4.1 million or 61% of sales in the same period last year. The increase in SG&A was due to the planned additional marketing and business development expenses related to the acquisition of the Tony Hawk Brand and additional marketing expenses to further support the global marketing of our legacy brands. Operating income improved 46% for the third quarter, totaling $3.8 million versus $2.6 million in the same period last year. EBITDA for the third quarter and year-to-date totaled $4.2 million, an increase of 62% and $13.8 million, an increase of 45% respectively, as compared to $2.6 million and $9.5 million in the prior year period. Our year-to-date performance continues to demonstrate the strength of our business model with operating margins hitting 46%, EBITDA margins topping 50%, as compared to 39% and 43% respectively in fiscal 2014. We ended the third quarter with net income of $2.3 million or $0.27 per diluted share, an increase of 44% when compared with $1.6 million or $0.19 per diluted share in the prior year period. On a year-to-date basis, net income totaled $8.2 million or $0.96 per diluted share, an increase of 61% when compared to $5.1 million or 61% per diluted share for the first nine months of fiscal 2014. As a side note, we achieved $0.72 per diluted share for the full 12 months in fiscal 2014. For the quarter ended November 1, 2014, we recorded a tax provision of $1.3 million, which equates to an effective tax rate of 35.8% compared to $0.9 million or an effective rate of 37.6% in the prior year period. Turning to our balance sheet and related metrics, total cash and cash equivalents as of November 1, 2014, were $5 million, compared with $3.6 million at February 1, 2014. Our balance sheet remains very strong with an increased cash position and decreased debt. Cash flow from operations was $7.6 million for the quarter, compared to $6.5 million for the prior year period. We remain in a strong financial position as we actively explore additional strategic brand acquisition. Thank you all for your time. I will now turn the call over to Henry.

[Henry Stupp:]

Thanks Jason and thank you everyone for joining us today on our third quarter call. As you can see, Cherokee continues to experience strong growth with revenues of 30% year-over-year, 23% on a year-to-date basis, as we continue to drive solid organic growth with our existing new brands. Our Canadian, Asian and Latin American business in particular continues to see great strength and an increasingly strong potential for further growth as we continue to introduce new partners and addition product category expansion with existing partners. International royalty revenues as a percentage of total revenue totaled 35%. Please note for comparative purposes, this percentage excludes the recently acquired U.S. based Kohl’s Tony Hawk revenue. Before delving further into a discussion of our international retail partner progress, I would like to turn back to our North American performance and specifically target where we're experiencing positive sales comp growth in Canada. While we added a solid Q3 with Target U.S., retail sales were softer than expected. That said, expansion merchandize is convenient to arrive and inventory levels grow, we're seeing positive sales trend heading into Christmas. Royalty revenues for the Cherokee Branded Target U.S. during the third quarter totaled $3.5 million, consistent with the previous time period. On year-to-date basis, royalty revenues totaled $12.5 million compared to $12.9 million for the first nine of fiscal 2014. In addition we believe that the retail sales declines that occurred as a result of the data breach of last December are currently behind us and we're anticipating an improved comparable for Q4. The Liz Lange brand, which is also marketed exclusively by Target has seen some challenges in the U.S. in this fiscal year where we believe that improved planning and fewer factory delays will contribute to future success with the brand. We've worked closely with Target and they're confident that the necessary adjustments have been made as we enter into fiscal 2016. Target remains bullish on the Liz Lange brand, especially in Canada where we're experiencing more success and very strong future. Liz Lange remains one of the very few maternity brands in the Canadian marketplace, presenting tremendous opportunities to gain significant market share. We look forward to sharing some exciting initiatives for the brand in future quarterly calls. Cherokee Target Canada has also performed well all year and we're very pleased with the continued trajectory of the Cherokee brand in Canada and feel that Target has been very proactive in making the necessary adjustments through the merchandize assortment, pricing and continuous in-stock improvement. Looking further at our North America performance, the Tony Hawk brand, which we sell exclusively through Kohl’s Stores and Kohls.com continues to see progress. Royalty revenues from our hot branded Kohl's were $1.2 million for the third quarter, $3.6 million year-to-date. We're very excited for the spring summer reset of the Hawk Brand, which will include a fully integrated marketing plan and updated in-store displays. We're also in advanced discussions to finalize international distribution of Tony Hawk and are fully confident that the brand will be global in the not too distant future. Tony's popularity is at an all time high and the reintroduction of the Hawk video game in 2015 will no doubt further reinforce the Hawk brand as the dominant street gate culture brand in the action and sports industry. In addition, we've been actively working to expand the ále by Alessandra brand internationally. Just post quarter end, we announced three new strategic partnerships for the brand in the accessories and footwear spaces and this is just the beginning of the rollout of category and brand expansion initiatives for ále by Alessandra and we intentionally introduced additional strategic licensees both domestically and abroad. As we spoke into in the past, our business in transforming from North American focus to global in nature, specifically during the third quarter, we reported very strong sales in Asia where revenue improved 25% year-over-year. Cherokee branded products performed very well at RT-Mart in China where we launched our in shop -- shop-in-shop concept and Cherokee performed just as stronger [indiscernible]. Our partners will be rolling out additional in-store shop-in-shops throughout Asia to further reinforce our brand marketing positioning in DNA. The Cherokee brand also officially debuted a full family assortment of Cherokee men's and boys, girls, infant and baby apparel at Big C stores in Thailand during the third quarter. Big C is one of the leading hypermarket operators in Thailand with a strong presence across multiple product categories from clothing and accessories and food and home décor and in India the Cherokee brand continues to see success in Megamart stores where retail sales year-to-date improved 7%. Also in India just post to quarter end, we announced the strategic partnership with Reliance Retail, focused on a newly developed brand concept that will be launched in India through Reliance Trends retail location. We're excited to partner with Reliance on this endeavor and to continue developing relationships with world-class retailers in all major markets. This new relationship in India marks our fourth partnership in the region and is the basis of our long-term strategic plan to build strong long-term base in all key global markets. Latin America remains one of the global markets where the Cherokee Brand continues to see strength. Retail sales for Cherokee and Comercial Mexicana grew 11% over the third quarter of fiscal '14 and we also made great strides with Tottus Peru and Tottus Chile, where retail sales climbed approximately 24% and 39% respectively over the prior year period. Revenues in the Middle East continued to climb with sales at Landmark’s Max Stores throughout the United Arab Emirates, Saudi Arabia and Kuwait, growing tremendously during the first nine months of fiscal ‘15. Turning over to Europe, we're currently in advanced negotiations to appraise Tesco. Simply put, we felt that the challenges faced by Tesco in their home market will continue to impede our progress and after several years until we plan to satisfy the U.K. consumer's appetite for Cherokee branded products, it was simply time to move on. Despite the challenges we face with Tesco, we've successfully grown our business in all major markets and it speaks to volumes and our brand, consumers and our message towards enjoying long-term sustainable growth. We've successfully growth the Cherokee branded business in other global markets to the point where we've reduced the exposure associated with Tesco revenue, which short of five years ago represented 40% of our scope. We're excited with the direction of where our Cherokee brand is headed internationally and look forward to working with new European partner that will make that will make their priority to service their customers with well designed quality products reaching our Cherokee brand, while leveraging Cherokee's already established high consumer awareness in the European marketplace. We also look forward to an announcement related to a new European partner for the Cherokee brand shortly. Thank you again for your time today. We're excited to be ringing the NASDAQ Closing Bell today afternoon, the webcast link to the live event can be found on our website cherokeeglobalbrands.com. And with that, operator, you may now open up the call to questions.

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session [Operator Instructions] Our first question today is coming from Jeff Van Sinderen from B. Riley and Company. Please proceed with your question.

[Jeff Van Sinderen:]

Hi. Good morning, everybody, and congratulations to everyone on the Cherokee team on the strong growth that you're experiencing.

[Jason Boling:]

Thank you.

[Henry Stupp:]

Thanks Jeff.

[Jeff Van Sinderen:]

Let me start with this. I know you mentioned that Target Canada is running strong, but in the U.S. it sounds like it was a little soft in the quarter, which, you know, was true for a lot of retailers with Target. But you also mentioned I think that today things were trending better, can you just give us a little more on that? Are you getting positive feedback on holidays so far on Target domestic?

[Henry Stupp:]

Yeah. We run analytics on a weekly basis, Jeff. So, we're looking at everything from EOH inventories, BOH inventories, sell-through rates. And we started to notice late in the third quarter that there were lower levels of inventories than we've traditionally had. We did a little bit of digging with Target, and clearly the [ports strike] [ph] slowdown in Los Angelis did have an impact in October. Target worked very aggressively to move goods through their DCs. That's what they've told us. And we saw an immediate impact in our November sales, which bodes well going in for Christmas.

[Jeff Van Sinderen:]

Okay. That's good to hear. And then, can you update us on the Target.com business? How you feel that's progressing just maybe in anything, any other color in terms of how the adult business, how you see that progressing?

[Henry Stupp:]

Well, we have several businesses on Target.com. So the adult business is slow and steady. We have an increased backlog for spring of next year over this past year. Our Cherokee school uniforms had a great performance going into back-to-school. We supported it with some search engine optimization testing, which had an immediate impact. And Target is very focused on increasing the Liz Lange brand profile on Target.com and we've got some initiatives planned for fiscal '16 that are all designed to support it. So, Target is still building their .com business. It's a long-term opportunity for us. We're going to work had to be an important part of it.

[Jeff Van Sinderen:]

Okay. Good. And then, just finally on Tesco ending, may be you can talk a little more about the picture to the extent that you can for U.K., E.U. licenses, and I guess just trying to get a better sense there of how you're thinking about that business developing with new partners?

[Jason Boling:]

Yeah. One of the slides shows some of the quantitative research studies that we conducted in May of this year, so it's fresh data. We have great awareness, great consumer response to the brand. We were very pleased with the results. There were some critical numbers in there that came up through the research study, one of research study. One of which was at the U.K. consumer. Up to 30% of Cherokee shoppers have felt that they purchased Cherokee brand outside of Tesco in the past. That was an important consideration for us as we began to pick up the pace in our negotiations with new partners. As you know, Cherokee was sold exclusively through Tesco for about 12 years now and yet the consumers' view of the brand and the awareness of the brand grew outside of its close association with Tesco and we felt that was an important marketing step for us. Most importantly, we had a lot of interest for a number of years in the U.K. as our product design internally with the infrastructure that we've put in place at Cherokee global brand has continued to grow with great reaction from our partners. We have something really tangible to sell. And as we started embarking on soliciting new partners or responding to the partners who came to us, we had definitive interest. What we will say today is that we are in advanced discussions and we hope to make an announcement regarding U.K and Ireland very shortly. And subsequent to that we will also be announcing additional partners in Europe.

[Jeff Van Sinderen:]

Good to hear. Thanks very much for taking my questions and continued success.

[Jason Boling:]

Thank you very much.

[Operator:]

Thank you. Our next question today is coming from Eric Beder from Wunderlich Securities. Please proceed with your question.

[Eric Beder:]

Good morning.

[Jason Boling:]

Good morning, Eric.

[Eric Beder:]

Congratulations on the solid quarter.

[Henry Stupp:]

Thank you.

[Eric Beder:]

Could you talk a little bit about the M&A environment, what you are seeing, and are you guys still very much focused on acquisitions in the coming year?

[Henry Stupp:]

Yes. We -- as you know, last quarter we announced that we were cutting dividend, focus the company on being -- pointing towards more growth. That growth will come through a combination of the continued focus on organic growth with our existing partners and the identification of new partners. And from a strategic standpoint, we have a very specific list of the kind of brands that we are identifying that fit into our infrastructure and will also be appealing to the global platform and the relationships that we've established around the world. There are several that we are looking at right now. And we hope in future quarters to make some positive announcements to that effect.

[Eric Beder:]

Okay. And in India you rolled out -- very quickly, you rolled out the Liz Lange brand with [BB&E] [ph] was that this quarter?

[Henry Stupp:]

No. We launched late second quarter; it's slow and steady growth there as we adjust the merchandise, the flow of merchandise, increase the marketing and awareness with an exceptional partner there. And obviously, India, in general, for us, is a core focus of our long range business plan. We think India is hitting an incredible sweet spot for the future. We now have several deals in India. All of our businesses in India are doing quite well, and we want to make sure that we take full advantage of the growing middle class, the increasingly young age in India. I think I read a statistic about 50% of population will be under the age of 35 in the next two years. So we are with the best retail partners in India. Our partners are doing extremely well; and adding Reliance, one of the biggest retail operators in India and their portfolio is a fantastic opportunity, not just for the new brand that we've created in partnership with them, but for any new brands that we look to introduce into India.

[Eric Beder:]

Great. And just one last question. So you're rolling out ideally next year, at the end of this year, next year we'll start to see Tony Hawk license expand and Tesco license to be replaced. Now historically, with licensing companies that usually entails 1 year to 1.5 years before those brands start to generate significant revenue. What can you guys do differently, or can you do something differently to make that sort of comes quicker to the company.

[Henry Stupp:]

Well, having the infrastructure like the one we've got -- first of all, it’s a great question. Our infrastructure is one that we've designed where we have turnkey product with a supply chain that all of our licensees can tap into on an immediate basis. So, unlike a typical scenario where you sign a licensee, they go through concept approval, pre-production approval, production approval, our licensees join us with a turnkey ready-to-go solution. And we could hit them well faster. So, we've seen generally in our peer group, it could take anywhere from 12 to 18 months for a licensee to hit the market once they've singed. We think we've cut that time dramatically. And our partners and new partners are recognizing that. So we think we look to results for the fiscal '15 from our new partnerships.

[Eric Beder:]

Great. Thank you and congratulations again.

[Henry Stupp:]

Thank you very much, Eric.

[Operator:]

Thank you. [Operator Instructions] Our next question today is coming from Joe Bess from Roth Capital Partners. Please proceed with your question.

[Joe Bess:]

Good morning. Thanks for taking my call. Just kind of following up on the last question, I guess could you talk a little about some of the main categories that may -- or that the new retailers in the U.K. are potentially interested in, and potential to expand upon the Cherokee and add potentially some of your other brands to those retailers.

[Henry Stupp:]

Cherokee sold as a full family lifestyle brand, adult and kids, apparel, accessories, footwear, home. We're looking for a partner who could take advantage of the full range of the product offering that we provide. And we feel that the people that we're talking to understand the size and scope of the opportunity and for our thinking, we think this is a good opportunity for us to reposition and develop our business in the future.

[Joe Bess:]

Okay. Great. And then thinking a little bit more about Target, we saw quite a few doorbuster deals for apparel for Black Friday I guess, can you just talk a little bit about how things trended going into December following Black Friday. It sounds like it is pretty positive for you guys.

[Henry Stupp:]

I’ll tell you two interesting things. We had a great November and doorbusters aside are averaging retails held were slightly up. So customer there is a Target guests like Cherokee. And we were delighted to see how we were positioned on the floor and I think Target is very much on track for the future and we are very bullish on Cherokee and Liz Lange going into next year. And like I said in our prepared remarks, I think the breach is behind them. I think the marketing that they put in place going through this Christmas is some of the best work that they've ever done. The stores look good and we said in previous calls and will say it again, we're lucky to have them as a [temple] [ph] partner for this Cherokee brand.

[Joe Bess:]

Great. Thank you.

[Operator:]

Thank you. Our next question today is coming from Liz Pierce with Brean Capital. Please proceed with your question.

[Liz Pierce:]

Thanks. Can you guys here me? I am in an airport.

[Henry Stupp:]

Yes. A - Jason Boling Yes.

[Liz Pierce:]

Okay. And I unfortunately got on a few minutes late. So just two questions that came to mind Henry listening to your comments, on Tony Hawk and I am sorry if you already mentioned this, so you're expanding it within Kohl's or you're expanding it into new partners globally or both.

[Henry Stupp:]

One of the fundamental strategic functions or goals of Cherokee is to continue to grow our brands from within all of our existing partners through the introduction of new categories and that is definitely a focus that we've been working on with Kohl. Separately the reason we got into the Kohl's -- into the Hawk business was the untapped global opportunity considering Tony's incredibly high awareness and that is the long-term significant opportunity for us in major markets like the U.K. and Germany, Western Europe, Australia, New Zealand, growth opportunities in Canada and Japan. So we're tackling in both ends. Similar to what we did with Cherokee when the new management team came in four years ago and we started building from within.

[Liz Pierce:]

Okay. I guess maybe I didn't -- it's clear. So have you announced different categories at Kohl's? I think that was what I really was trying to figure out.

[Henry Stupp:]

We would never announce category in advance of retailer announcing the category.

[Liz Pierce:]

Got it. Got it. And then just curiosity in some of your comments about Liz Lange and maternity, especially given the problems that some of the -- one of the major [interim] [ph] retailer is having in the domestic market. You guys aren’t seeing any of that kind of where the millennial is just not interested in first Target ware or you kind of bridge maternity and traditional kind of ready to wear?

[Henry Stupp:]

Well the first thing I’ll tell you Liz Lange is not a traditional maternity brand. Liz Lange was first to identify the fact that women wanted to express themselves, but not wearing their husband’s oversize Oxford shirt and she has got that very clear opportunity and I think that’s one of the things that attracted Target to it. The softness that we felt from the first half of the year was related to some delivery issues that Target advice us on and some decisions related to merchandize assortment. There is a great buying team in place with Target and we've worked with them closely and we think that the minor issues that we felt at the beginning of this past year have been corrected going into next year. Target is bullish on Liz Lange. Now that’s in U.S. As far as Canada goes, Liz Lange is a huge hit and we're very excited by the brand prospects there. We don’t have the same level of competition in the Canadian market as we do in the U.S. market and we think Liz Lange has created a great lane for her brand and we will continue to see great results as we move forward.

[Liz Pierce:]

Okay. Thank you very much and best of luck for the rest of the fourth quarter.

[Henry Stupp:]

Thank you very much.

[Operator:]

Thank you. That concludes our question-and-answer session. I will turn the floor back over to management for any further and closing comments.

[Henry Stupp:]

Thank you. Thank you all again for joining us on today’s call. I wanted to mention again how excited I am to be ringing the NASDAQ closing bell later today and I couldn’t be more proud that both Tony Hawk and Liz Lange will be joining Cherokee and our leadership team. Management will be available to take some calls later today and once again thank you for joining us.

[Operator:]

Thank you. That thus concludes today’s teleconference. You may disconnect your lines and have a wonderful day. We thank you for your participation today.