Cherokee Global Brands, the parent of Hi-Tec, Tony Hawk Signature Apparel and Flip Flop Shops, reported a loss in its first quarter ended April 29, impacted by the decision by Target, the discount chain, to stop selling the Cherokee brand. The company also said it was seeking an amendment related to a non-compliance with covenants under its credit facility.
“Operationally, fiscal 2018 is off to a solid start,” said Henry Stupp, CEO of Cherokee Global Brands. “During the first quarter, we continued to make progress in diversifying our global points of distribution and building upon the relevance of our high-equity brands through category expansion and new format initiatives. Today, our business model is more balanced and demonstrative of our go-forward strategy whereby revenue contribution will be more evenly split across brand, product category and geography.”
“The Spring 2017 launch of our Cherokee brand in the U.S. continues to track positively and deliver positive initial sell-through. We look forward to continuing to expand our distribution as we head into the important back to school season, for which we have also received several significant school uniform commitments. As we continue to ramp our new wholesale licensing relationships for the Cherokee brand in the U.S., we expect revenue contribution more consistent with the broader retail industry, which will be reflected in our second half 2018 financial performance. Outside of the U.S., we remain very pleased with the growing consumer awareness and demand for the brands iconic lifestyle assortment of products across the globe.”
“The theme of domestic expansion continues with our Tony Hawk brand where, in partnership with our new U.S. wholesale licensees, we have secured orders for an expanded distribution of Hawk products starting this July. Our newly expanded distribution will entail additional categories not previously available in the U.S., including accessories, footwear, socks, underwear and sleepwear. We are also in advanced discussions to expand the Tony Hawk brand throughout Asia, through wholesale, e-commerce and brick and mortar retail, the timing of which is well aligned with the anticipated introduction of skateboarding as an Olympic Sport in the 2020 Olympic Games in Japan.”
“Turning our attention to Hi-Tec, we continue to focus on product category expansion including apparel and accessories, in addition to broadening our global distribution footprint. In partnership with our licensees, we continue to expand the global distribution of our core footwear programs for men, women and children. On the domestic front, we’ve secured partners for the licensing of apparel and accessories in the US and Canada, and look forward to sharing the details of our expanded distribution in the region in the near future.”
2018 First Quarter Financial Results
Consolidated first quarter revenues, including the contribution from Hi-Tec, were $11.1 million. On a year-over-year comparable basis, Cherokee Global Brand revenues, excluding Hi-Tec, were $5.2 million, a decrease of 51.4 percent from $10.7 million in the prior year period. The year-over-year decline is largely due to the decrease in North America revenues related to the Cherokee brand as the company continues to transition to new wholesale licensees. During the quarter, some of the decrease was offset by global revenue increases, particularly in Europe, Asia and South Africa as the demand for Cherokee-branded products continues to grow.
Hi-Tec revenues totaled $5.9 million and included $4.3 million in indirect product sales related to distribution and government contracts, as well as $1.7 million in licensing revenues stemming from new and existing licensing deals for the Hi-Tec portfolio of brands. Gross profit from Hi-Tec indirect product sales was $1.3 million, and is inclusive of $3 million in cost of goods sold.
GAAP selling, general and administrative expenses were $10.2 million, compared to $6.4 million in the prior-year period. The year-over-year increase was primarily due to the inclusion of operating costs for Hi-Tec of $3.6 million which includes accounting, legal, integration and restructuring costs incurred during the first quarter.
Non-GAAP SG&A which excludes accounting, legal, integration and restructuring costs related to Hi-Tec was $8 million. Excluding Hi-Tec SG&A of $2.9 million, Cherokee SG&A was $5.1 million compared to $5.7 million in the prior year period.
GAAP operating loss totaled $2.1 million, compared with GAAP operating income of $4.3 million in the prior-year period. Non-GAAP operating income for the first quarter of fiscal 2018 was $0.1 million, or 1 percent of revenues, compared with $5 million, or 47 percent of revenues, in the prior year period.
GAAP net loss totaled $3.3 million, or 25 cents per diluted share, compared to GAAP net income of $2.6 million, or 29 cents per diluted share, in the prior-year period. Non-GAAP net loss totaled $0.9 million, or 7 cents per diluted share. This compares to Non-GAAP net income of $3 million, or 34 cents per diluted share, in the prior-year period.
Adjusted EBITDA was $0.7 million, compared to $5.4 million in the prior year period.
At April 29, 2017, the company had cash and cash equivalents of $5.7 million, compared to $8.4 million at January 28, 2017.
On June 27, 2017, the company obtained a forbearance from Cerberus regarding the company’s failure to comply with certain covenants set forth in the Cerberus Credit Facility. Pursuant to the forbearance, Cerberus has agreed that it will not exercise its rights or remedies under the Cerberus Credit Facility through July 7, 2017. The company is in advanced discussions with Cerberus to amend the Credit Facility, but the terms and timing are uncertain. Absent an amendment to the credit facility or an extension of the forbearance period, upon expiration of the forbearance period, Cerberus will have the right to terminate its obligations under the Credit Facility and accelerate the debt. At this time, however, the company expects that an amendment of the credit facility will be completed and that the Form 10-Q will be filed in the near term.
The company owns Cherokee, Carole Little, Tony Hawk Signature Apparel and Hawk Brands, Liz Lange, Everyday California, Sideout, Hi-Tec, Magnum, 50 Peaks, Interceptor and Flip Flop Shops, a leading franchise retail chain.