Cherokee Global Brands landed an agreement with German grocery chain Lidl for its flagship Cherokee brand as it move further to expand a business once tied largely to Target, CEO Henry Stupp told analysts.

The agreement with Target ended a year ago, capping a 20-year run, and the chain accounted for just 3% ($900,000) of Cherokee’s annual sales of $29.3 million in the year ended Feb. 3, down from 33%, a year earlier. The pact with Lidl for apparel potentially could give Cherokee access to Lidl’s more than 10,000 stores across Western Europe and Scandinavia. Royalties from Cherokee branded revenue in Q4 tumbled to $2.2 million, down from $4.6 million a year earlier. For the year, Cherokee brand royalties were $11 million, a decrease from $23 million year ago.

Cherokee also has signed a new agreement with Stargate Apparel for  Cherokee boys (ages 4-20) and girls (ages 4-16) sportswear and fashion clothing, returning to a licensee that previously was the brand’s supplier to Target. The Mexican department store chain Soriana also extended its Cherokee DTR to another 200 locations.

The gain in distribution for the Cherokee brand came as the company struggles to recover from a Q4 net loss that widened to $45.1 million from $11 million a year earlier as the company took a $12.2 million asset impairment charge tied to the Tony Hawk and Hawk Signature trademarks. Revenue from the Tony Hawk brand were flat in Q4 at $1.4 million and rose 7.8% to $5.5 million for the year despite its DTR ending at Kohl’s in January. Kohl’s’ minimum guarantees were 15% ($4.6 million) of Cherokee’s annual revenue, against 14% ($4.8 million) a year earlier. The Tony Hawk brand has gained distribution in Canada where it is available in more than 400 stores, including Walmart. Walmart also is carrying the brand in Argentina and Chile. Separately, Cherokee is in discussions on a potential pan-European license for Tony Hawk, Stupp said

Overall, Cherokee’s Q4 revenue declined 14% to $29.3 million. In addition to the decline in Cherokee branded revenue, licensees’ sales of Liz Lange apparel declined 55% for the year to $1.1 million as a DTR at Target ended on Jan. 31. Cherokee took a $14 million asset impairment charge for the brand in Q4.

The declines were partly offset by gains in royalties from sales of Hi-Tec, Magnum, Interceptor and 50-Peaks brands to $9.7 million from $1.1 million a year earlier. Cherokee acquired Hi-Tec and the affiliated brands in late 2016. Cherokee converted effective in January Hi-Tec’s previous business through distributors in Latin America, Middle East and Eastern Europe to single licensing agreement with International Brand Group. As a result, Cherokee took a $2 million charge in Q4 as it slashed Hi-Tec staff by 60% in moving to cut costs. The layoffs were at Hi-Tech’s headquarters in Amsterdam and Cherokee offices in California.

Cherokee also took $8.4 million and $900,000 assets impairment charges for Flip-Flop Shop and Everyday California trademarks, respectively, in Q4. The charge for licensed Flip-Flop Shops was tied to the closing of 20 locations in 2017 as the chain ended the year with 56 locations, including 43 in the U.S. Flip-Flop Shop royalty revenue fell to $2.1 million from $2.4 million. Cherokee Flip-Flop licensees, which once operated more than 100 locations, plan to expand the chain by June in adding 20 locations, Stupp said.

With the increased losses and charges, Cherokee’s issued a notice about its ability to continue as a “going concern” if it can’t renegotiate a credit agreement with lender Cerberus. The pact, which expires in 2021 and has been amended in the past, requires $2 million in liquidity, a term Cherokee will violate within the next year short of a cash infusion or increase in borrowing capacity, Cherokee said.

Contact:

Cherokee Global Brands, Henry Stupp, CEO, (818) 908-9868 x200, henrys@cherokeeusa.com