Apex Global Brands Inc
Q4 2015 Earnings Call Transcript

Published: 17 Apr 2015

[Operator:]

Greetings and welcome to the Cherokee Global Brands Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief 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, Kimberly Esterkin of Investor Relations. Thank you. 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 also 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 and uncertainties and other matters can be found in the Company's Annual Report on Form 10-K for the fiscal year 2015. 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 afternoon and thank you for joining us today. We are pleased to report that we had another profitable year with revenues for the fourth quarter increasing 18% to $7.5 million compared to $6.4 million in the prior year period. For fiscal 2015, revenues increased 22% to approximately $35 million from $28.6 million in fiscal ’14. The increase in revenue are attributed to the organic growth from our domestic and international licensees and from our Tony Hawk brand acquisition. Revenues this year are the highest they have been since 2009, demonstrating the talents of our team, the continued performance of our portfolio of brands, our licensee relationships and the forward thinking value proposition associated with our 360 degree turnkey solution. It is important to keep in mind that revenues improved year over year despite some short term challenges we faced with Target. We maintain a very strong partnership with Target and are working closely with Target as they reorganize internally and work through port delays which we believe have now been solved. We are also working quickly to expand our presence in Canada, a topic Henry will talk about further. Our plan is to continue generating organic growth by utilizing our propriety 360 degree turnkey solution to further expand the categories and geographies for Cherokee, Hawk, Liz Lange and Ále brand while continuing to pursue new brand acquisition. Selling, general and administrative expenses for the fourth quarter decreased 2% to $4.8 million or 64% of revenues, from $5 million or 78% of revenue in Q4, 2014 demonstrating the leverage in our business model. On a full year basis, SG&A was up 5% to $19.6 million or 56% of revenue, compared to $18.6 million or 65% of revenues in the prior year, due to planned expenses relating to the marketing and design of the Tony Hawk and Cherokee brands. Operating income improved significantly and was up 89% for the quarter, totaling $2.7 million versus $1.4 million in the same period last year. For the full year, operating income improved 54% to $15.4 million compared to roughly $10 million for fiscal 2014. EBITDA for the fourth quarter totaled $3.1 million, an increase of 74% as compared to $1.8 million in the prior year period. For the fiscal year, EBITDA totaled $16.9 million, up 49% from $11.3 million in 2014. Our performance continues to demonstrate the strength of our business model. Operating margins on a quarterly and full year basis did 36% and 44% respectively compared to 22% and 35% in fiscal 2014. Our EBITDA margins totaled 42% and 48% respectively as compared to 28% and 40% in fiscal 2014. We ended the fourth quarter with net income of $1.7 million or $0.19 per diluted share, an increase of 75% from approximately $1 million or $0.11 per diluted share in the prior year period. For the full year, net income totaled $9.8 million or $1.15 per diluted share, an increase of 62% from $6.1 million or $0.72 per diluted share in fiscal 2014. For the year ended January 31, 2015, we recorded a tax provision of $4.7 million which equates to an effective tax rate of 32.4% compared to $3.4 million or an effective tax rate of 35.9% in the prior year period. The decrease in our effective tax rate is due to standard discrete items such as the settlement of various tax audits. Turning to our balance sheet and related metrics. Total cash and cash equivalents as of January 31, 2015 were $7.6 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 $10.4 million for the year compared to $8.6 million for the prior year period. The increase in cash flow from the prior year can be attributed largely to the increase in net income. We remain in a strong financial position and as we actively explore additional strategic brand acquisitions. 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 this afternoon. Cherokee Global Brands continues to experience strong growth with our portfolio of brands as full year revenues grew 22% and our EPS improved nearly 60% on a year-over-year basis. We carefully managed our operations to generate improving operating and EBITDA leverage. There is no doubt that fiscal 2015 was a highly productive year for Cherokee Global Brands. Throughout the year, we successfully executed against our long term business strategy by securing new partners such as Argos in the US and Ireland, Reliance in India, Big C in Thailand and a slate of wholesale licenses for our Ale by Alessandra brands, growing our company both organically and through acquisition. On the acquisition side, we started the calendar year by welcoming the Tony Hawk and Hawk Signature apparel brands into our family lifestyle portfolio. Royalty revenues from our Hawk branded Kohl’s were $4.8 million for the fiscal year and represented 14% of total royalty revenues in 2015 as compared to 2% of royalty revenues in 2014 when we just acquired the brand. We are very excited for the spring summer reset of the Hawk brand over the coming weeks and are working with Kohl’s stopper shoppers and [indiscernible] in-store experience for the brand. Further we recently announced a pan European license for Hawk with Sports Direct, we have the largest sporting goods retailers in the world. We are in advanced discussions to finalize additional distribution of the Hawk brand and anticipate providing further positive news in the coming weeks and months. Once again we are pleased with the performance of our brand portfolio as we experienced continued organic growth domestically and internationally for both Liz Lange and Cherokee. International growth of the Cherokee brand is where [ph] we saw significant organic growth in fiscal ’15. International Cherokee royalty revenues as a percentage of total Cherokee revenues were 40% for fiscal 2015 as compared to 35% in the prior year. With strong brand awareness and the demand for Cherokee products in the UK, we successfully entered into a new license agreement with Argos, a leading UK based retailer with a brand range [ph] of a full family lifestyle product assortment online, in catalogs and have more than 750 stores across the UK and Ireland this upcoming fall with a further extended product offering planned for the future. We believe this collaboration with Argos will provide a great home for Cherokee brand with their successful growth oriented forward thinking partner that is able to fully realize the potential of our brand and the proprietary 360 degree solution. Cherokee will be the first family lifestyle to be featured at Argos and the Cherokee and Argos believe that this introduction will help further the brand and the retailer success while also driving further interest in the European communities. One of the more exciting trends in UK retail sales is ecommerce. In 2014, internet sales comprised 44% of Argos’ total sales, with mobile commerce growing by 89% during the year. Argos has made many advances in its digital offering and we look forward to leveraging the retailer’s internet and mobile strengths to further promote the Cherokee brand. As always, we will keep you updating our development with Argos throughout the year. Canada is another country where [indiscernible] Cherokee brand is exceptionally high awareness enabling our brands to succeed despite several retail partner transitions. After completing the transition to Target in 2014, the Cherokee brand is now in the midst of finding a new retail home in Canada. We are currently in advanced discussions with a new Canadian retail partner that has no doubt taken notice the Cherokee’s incredible brand awareness and long history of success. We hope to provide positive news on this development in the very near term. We’ve also seen tremendous growth in Latin America. Retail sales for the Cherokee brand and Comercial Mexicana where we now have over 20 shop-in-shops grew 4.8% over fiscal ’14 in local currency. We’ve also made great strides with Tottus Peru and Chile where full year retail sales of Cherokee branded products climbed approximately 25.6% and 30.9% respectively over the prior year period, again in local currency. In Asia, we continue to report very strong sales for fiscal 2015 with full year revenues improving roughly 30% year over year. Cherokee branded products performed very well both Nishimatsuya in Japan and RT Mart in China where we rolled out additional in-store shop-in-shops to further reinforce our brand’s marketing, positioning and DNA [ph]. Specifically Japan sales increased 57% and China retail sales saw growth of 10% in local currency. In India, the Cherokee brand saw consistent success at Megamart where retail sales improved 10% year over year in local currency. And we are also making solid progress with Reliance Retail, our fourth and newest partnership in India where we will be introducing a new brand later this summer. While international growth is certainly key to our success, our North American sales team remains core to our progress as well. I’ve already spoken about Canada. So I will now turn to Target US and the Cherokee brand. As Jason mentioned previously, we had a softer than anticipated fourth quarter at Target US. The combination of port delays, particularly in January along with Target’s well publicized internal reorganization challenges slightly impacted Cherokee’s retail sales during the quarter. Due to the timing of the royalty rate adjustment, despite softer Q4 sales, our Q4 royalty revenue for the Cherokee brand at Target US totaled $2.5 million, up 3% from $2.4 million in Q4 2014. On a full year basis, royalty revenues totaled $15 million compared to $15.3 million in fiscal 2014. Despite softer than anticipated revenues in Q4, we did see strength in infant products to choose, we continue to be part of this largest brand [indiscernible]. Separately although it’s interesting, Cherokee adult products served exclusively on Target.com performed well. We continue to work with Target’s largest business as they emphasize their ecommerce platform. The Liz Lange maternity brand which is also marketed by Target has seen some challenges. Supply issues and port delays had an impact on largest sized clothing shipments to Target, including maternity closing and hampered Liz Lange sales towards the end of the fourth quarter. We believe that Target has improved their planning and are starting to see positive signs relating to the future success of Liz Lange maternity brand. As we continue to make progress in the US and roll out a new partner in Canada, we will update the market on our developments with Liz Lange. In addition, we are seeing much growth and success with the Liz Lange collection business on home shopping network. Retail sales royalty revenues grew more than 70% year over year. HSN is a very strong support of the Liz Lange brand and with its direct on-air involvement has certainly increased the brand’s awareness throughout the US. Before opening up the call to questions, I’d like to take a few moments to update you on our acquisition strategy. Over the past two years, Cherokee has made three accretive acquisitions. Liz Lange, Cherokee’s [indiscernible] and most recently the Tony Hawk brand. We have the bandwidth to bring a new brand and we’ll continue to make strives to acquire more brands should the right candidate come along. Our deal acquisition candidates remain style focused lifestyle brands with an EBITDA of $5 million to $15 million and high potential for international market expansion. Looking back over the year, we definitely made great progress. [indiscernible] model is now resonating throughout the globe. Our operating and EBITDA margins are improving and our brands are continuing to gain strength and visibility. While our work is not complete, we are on the right path. In fiscal 2015, we will continue to focus on promoting our two core platforms for growth

[Operator:]

[Operator Instructions] Our first question comes from the line of Jeff Van Sinderen with B. Riley.

[Jeff Van Sinderen:]

Maybe you could start with – I know you weren’t alone in the port issues with Target. Maybe you can just touch on where you feel they are now in resolving those issues as things start to normalize and then maybe just touch on any new initiatives you are working on with Target, a bigger place to start ---

[Henry Stupp:]

Hi Jeff, thanks. Thanks very much. So with respect to port issue, we talk to Target yearly and I think that based on the results we’ve seen in the course of February and March, and we extract the sales and earnings on a weekly basis, and we’ve watched and start to creep back up purchases. A good example of how the goods are now starting to flow into this growth, a very great positive, positive growth. So I think that though it hasn’t been completely resolved all of it yet I think the port issue is already behind them. With respect to new initiatives, Target has clearly decided to focus sales in the US which I think is a very good thing and given that of the scratching as they are found to be paying, worked a lot, address those things in terms of offload the decision, and we are refining and taking a business. Clearly we leave a portion to the farmers, it’s a very important strategic move for them and based on our structure, our 360 degree structures we are appreciated to further growing dotcom business.

[Jeff Van Sinderen:]

And then maybe you can also just – if we can shift over to the Argos license, maybe how you see that versus your prior license for that region and – I think you mentioned other – and I know for some of the brands you’re looking at other licenses. So maybe you can just touch on other European regions where you think you might be able to venture and then maybe just give us a sense on how you think the ramp-up with Argos will go, any financial metrics there? Thanks.

[Henry Stupp:]

In terms of their working with us, why am I getting an echo – in terms of their working with us, we are fully integrated into their operations right down to having staffing inside Argos, that’s able to work with them on a day to day basis. We have worked very closely with them in terms of developing a line architecture and a pricing architecture for the future and we are well into our 2015 planning with them. From a marketing standpoint, we are very excited to our launch this year, I’ve worked closely with their team to develop a very exciting launch of the brand at Argos, that’s going to really re-inspire the market and based on the announcement, our willing partner, and a partner that’s coming into this brand from the position of strength, that’s attractive a lot more and to expand the Cherokee brand in Europe. So in terms of numbers, we are not yet ready to disclose anything and we can’t get into details into marketing because of the nature of the launch.

[Jeff Van Sinderen:]

And then maybe you can touch on your newest sports license and I will let someone else jump in, just any metrics you can share there, how you expect that to ramp up – I guess how you view that partner and anything else you can share on that, would be helpful.

[Henry Stupp:]

In terms of – we wanted to put together – the best top sports partners around the world to bring into the Tony Hawk sports. Clearly Sports Direct will be one of the top two or three retail partners that we desire to have growing our blue chip licensees. Having Sports Direct as a pan European partner and also given their nature to be highly aggressive and to dramatically grow their business over the next few years, we couldn’t have selected a better partner. At present we are looking to launch later in this year. I suspect they may launch a little earlier than what we are planning right now based on some other activities that Tony is doing on in Europe that we want to take advantage of. So we couldn’t be more thrilled and like everything once we get over the tipping point of one major partner, then other partners start to realize that this is going to be a global brand opportunity and that’s starting to see and hopefully activate some of the other licensees that we have been talking to, particularly other countries, Western Europe, Asia and South America.

[Operator:]

Thank you. Our next question comes from the line of Eric Beder with Wunderlich Securities.

[Eric Beder:]

Could you talk a little bit about the 360 marketing and how – letting you roll out Tony Hawk and some of the other brands this year quicker than you would in prior years?

[Henry Stupp:]

Well, absolutely. So first and foremost, we’ve publicly stated that organic growth is one of the fundamental requirements in building our foundation. So we are seeing tremendous success in organic growth with all of our brands in all major markets. Simply put, our licensees are profitable, they are happy, they are renewing early, they are renewing for extended periods of time and that’s something that we are very, very proud of and I can thank our entire team here for their support. Fundamental to that was the development of our 360 degree infrastructure. What that does is allows us to solicit a partner, sign an agreement with them knowing that product has already been development through our product development team, it’s already been sourced with best in class manufacturers that have been fully vetted and certified through outside third parties and a full slate of marketing tools. So a new partner can enter the business running as opposed to initiating at the time of deal that started their own product development and sourcing life cycle. So we’re able to hit a market with Argos within six, seven months and I suspect that that timeframe as we secure new partners and new markets around the world, will be even shorter. So we are really proud of what we are doing and where that’s going and it’s allowing us to really realize the operational leverage for today and as we enter new markets, the infrastructure is pretty much go in here and we anticipate growing our operating margins as well.

[Eric Beder:]

Great. In terms of the acquisition market, are you seeing a flow you want to see and – our properties coming in, what the valuations you think that they should be working – how is the market actually looking for acquisition?

[Henry Stupp:]

We have a pretty big slate of things that we are seriously considering acquiring and the valuations of late for some of the brands have gone quite rich. I don’t think that, that’s – we are not in a position where we have to buy a brand to grow our top line revenue. Vince Lombardi said once that, the measure of who we are is what we do with what we have and clearly the organic growth and the contribution it makes for EPS is something that we are very proud of. That said a good acquisition that follows our metrics for which there are several on the table for us right now is an area that we will move into and there is no shortage of brand opportunities available to us or our peer group. We’re just on a collective ones that fit well into our infrastructure, most importantly ones that will really benefit from our global platform which frankly is a lot harder to develop and realize, then I think the market views that has been. It’s not easy running a business in Europe and Asia, and Latin America and generating real volumes with real partners and just because you have a desire to expand internationally doesn’t necessarily mean that you can just push a button and hit those markets running.

[Eric Beder:]

And finally you have – historically most of your licensee yard – does that prevent you from potentially buying a more traditional licensing company that does it by category? And does that model – does the 360 model work as well in that sense?

[Henry Stupp:]

It does. The 360 model – absolutely we are working on wholesale and DTR model, because what traditionally happens and I was on the wholesale side for many many years, that it becomes an ad-hoc licensing program where you have licensees, wholesale licensees running through whichever retailers that they have licenses with and that’s not necessarily good for the long term strategic direction of the brand. That’s where DTR where you’re focused with a retail partner in each country has allowed you to have a strategic rollout of the program. That said, because we are so intrinsically involved in product development all categories and the marketing, even on a wholesale basis we are able to strategically align our licensees where they have chosen distribution channel. And so we are bullish on that. We are 100% open to wholesale licensing, primarily in the upper tiers of distribution where I believe retailers have a little bit more flexibility to afford the wholesale model, where the wholesale licensees take a markup. We are seeing that success with the Ale by Alessandra brand which right now is being distributed at the upper tiers of department store and we had a fantastic launch yesterday with Babel Bar [ph] which we are extremely excited about. I do generally feel, however, that retailers are going to continue with the margin constraints and that makes those ask the question over how successful can a third party wholesale import would be in providing goods at the mid to mass tier, then they have to take a markup, and I think that really leads us to believe that the DTR model is about to undergo an incredible renaissance to mid to mass level particularly where we are able to do some of the heavy lifting at a time where retailers cannot get the IMUs that they used to get nor can they afford the infrastructures that they have built up over the last decade or two.

[Operator:]

Thank you. Our next question comes from the line of David King with Roth Capital Partners.

[David King:]

I guess first off following on some of the commentary around Target, obviously port issues weighed again this period and obviously we all know the Target having this is I guess based on the conversations you are having with them, based on the fact that the ports are obviously still slipped I think the first quarter a little bit, I guess, Henry, how are you thinking about that business and when we could get turn and how far out is that following – how you think in terms of their numbers, or in terms of your numbers at retail, those being down for call it, four or five quarters, how far away do you think we might be from a turn of, of course, using your crystal ball?

[Henry Stupp:]

So just taking a step back, last year was book ended by the breach at the beginning of the year and then at the end of the year we had the port issue. So we entered this year unfortunately with the port issue, the lag over from holiday going into Q1. However we are excited with what we are seeing in terms of the retail for Cherokee branded product as we speak. We are having a very good quarter and Target in general is really executing on their plan and as Target does better, we anticipate Cherokee will continue to grow along side that. What’s also starting to become very exciting for us is the growing ecommerce business, that is now turning into a multi-million dollar retail sales on a monthly basis, and that’s something that we are very excited and seeing in terms of our weekly and monthly reporting that we are getting back from Target. So Target is clearly exercising on their plan and we expect that we will get our share of this.

[David King:]

And then following up on the Sports Direct deal for Hawk, I guess to what extent, we think about Hawk today, to what extent is that brand still under earning relative to the minimums and then when should you expect to kind of cross that threshold and then with that Sports Direct deal, how does that change it in terms of that – those sort of numbers, obviously that changes both the minimums and the threshold that you have across –

[Henry Stupp:]

Well given the timing of the acquisition at the beginning of last year, mostly last year was put to back in terms of Kohl’s, they buy six to nine months out. So the first impact we could normally have made with Kohl’s was to fourth quarter, and of course, Kohl’s like every retailer, did suffer from the port issue and that did negatively impact the upside opportunity of the Kohl’s business going into Christmas. Hawk is doing extremely well at Kohl’s as we speak and in terms of retail sales, I will also tell you in terms of profitability, it’s one of the most profitable brands on the store and that’s really critical as we plan out our business going forward. Separate to Kohl’s where we are bullish on it, the factors is that we do believe this year we will start to see the ramp up of the globalization of the Hawk brand starting of course with the Sports Direct and then ultimately some of the other deals that we intend to close in the next few weeks to month.

[David King:]

And then I guess finally from me, in terms of Argos, obviously a lot of that business is online and it seems like that’s what you guys are planning as well in terms of having a big ecommerce presence for Cherokee. I guess can you give us some color or context around how big in terms of percentage of revenue, whether it’s typical for them or what’s a good way to sort of think about the percentage for you guys that you think you might get going to the ecom versus retail stores et cetera?

[Henry Stupp:]

Too early to comment, we need ecommerce and retail stores – as it relates to the Cherokee brand. Just one minor correction, there are 750 Argos stores in the United Kingdom and Ireland. So we anticipate that well a large part of the decision to purchase Cherokee mostly will be derived through the mobile app and the internet, at least 50% of the sales we estimate will be made directly at the store. End of Q&A

[Operator:]

Thank you. Ladies and gentlemen that is all the time we have for question and answers today. I would now like to turn the floor back over to management for closing remarks.

[Henry Stupp:]

Well I believe – I just want to thank everyone for joining us today. We are available – I know we have some calls scheduled and we look forward to answering any further questions that you may have. In a great year, I once again have to compliment the entire team and thank our board for its continued support of the company. Have a great day.

[Operator:]

Thank you ladies and gentlemen. This does conclude the teleconference for today. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.