Apex Global Brands Cuts Outlook On Weakening Retail Conditions

Apex Global Brands Cuts Outlook On Weakening Retail Conditions

Apex Global Brands, formerly Cherokee Global Brands, said it added a number of new licenses and product categories to support the company’s brand portfolio that includes Tony Hawk, Hi-Tec and Everyday California in the second quarter while also reducing costs. Revenue guidance for the year, however, was lowered due to softness in U.S. retail and the impact of Brexit.

On a conference call with analysts, Apex also cited the impact of the weakening British pound sterling and Euro for the guidance revision and indicated it is taking further steps to reduce its SG&A expenses.

For the full year, Apex now expects:

  • Revenues in the range of $23.0 million to $24.0 million compared to previous guidance of $24.5 million to $26.5 million;
  • SG&A expenses to be in the range of $13.2 to $13.7 million versus a range of $14.0 million to $15.0 million previously; and
  • Adjusted EBITDA in the range of $9.8 million to $10.3 million, down from previous guidance in the range of $10.5 million to $11.5 million.

Revenues reflect royalties as Apex licenses its brands to manufacturers across categories or retailers. Brands include Hi-Tec, Magnum, 50 Peaks, Interceptor, Cherokee, Tony Hawk, Liz Lange, Point Cove, Everyday California, and Sideout.

In the second quarter ended August 3, the net loss narrowed to $1.3 million, or 8 cents a share, from a loss of $9.1 million, or 65 cents, a year ago.

Revenues in the quarter declined 21.1 percent to $5.6 million. The decline largely reflects decreases in the company’s Cherokee and Hi-Tec royalties in Europe, and the non-renewal of the company’s Cherokee license in South Africa at the last year, and 2019 and the sale of the Flip Flop Shops franchise business in June 2018. Economic uncertainty related to Brexit continues to impact several of the company’s European licensees. The strong U.S. dollar against the British Pound Sterling and Euro is also reducing the dollar value of the company’s European royalty revenues. Decreases in revenues were partially offset by revenues from the company’s new design services agreement with Walmart China.

By brand, Cherokee’s revenues fell to $1.9 million from $3.5 million a year ago. Sales of Hi-Tec, Magnum, Interceptor and 50 Peaks reached $2.75 million, down from $3.0 million. Hawk’s revenues came to $70,000, down from $145,000. Other brands’ revenues amounted to $881,000, up from $471,000 a year ago.

SG&A expenses in the quarter declined 22.5 percent to $3.1 million as a result of restructuring efforts that reduced spending for payroll and general operating costs. The company also reduced the size of the company’s Board of Directors, and board members now receive their compensation in common stock.

The company’s other operating expenses include non-cash charges of $800,000 for stock-based compensation and depreciation and amortization and $100,000 for business acquisition and integration costs. In the second quarter of the prior year, these charges totaled $5.5 million primarily as a result of restructuring charges.

Interest expense was $2.3 million in the quarter, which includes $600,000 of non-cash charges for deferred financing costs. In addition to ongoing interest payments, the second quarter of the prior year also included $800,000 of interest payments and $3.2 million of non-cash charges related to refinancing the company’s former credit facility.

Operating income came to $1.6 million for the quarter compared to an operating loss of $2.4 million in the same period a year ago.

Adjusted EBITDA decreased to $2.5 million for the quarter, compared to $3.1 million in the prior year. This decline was due primarily to lower revenues from the company’s existing licensees in Europe and the non-renewal of the Cherokee brand South African licensee, offset by the decline in SG&A expenses.

Apex noted that several of its key legacy brands including Cherokee, Hawk Signature, Tony Hawk, and Liz Lange, are shifting their U.S. sales from DTR (direct-to-retail) licensing to wholesale licensing in a change in the company’s business strategy. In addition, the company is focusing on wholesale licensing globally rather than DTR for the recently acquired Hi-Tec, Magnum, Interceptor and 50 Peaks brands. The transition to new licensees has had a negative effect on near-term results.

Apex noted a number of licensing updates subsequent to the end of the second quarter:

  • In August, Everyday California launched at Tiendas Chedraui, one of the largest retailers in Mexico. Chedraui stores will carry an expanded assortment of Everyday California men’s, women’s and children’s apparel, accessories and casual footwear beginning this fall.
  • Through several new global licensing agreements reached in August, the Tony Hawk brand is being expanded across categories ranging from little and big boys’ clothing to young men’s and men’s clothing and accessories.
  • In September, Apex announced the continued expansion of the Hi-Tec and Magnum brands through new licensing and distribution partners in the U.S., China and Korea. The new license and distribution agreements for Hi-Tec, Magnum and Tony Hawk are expected to add incremental full-year revenue of $1.25 million to $2.50 million starting in Fiscal 2021. Additionally, the company is in the process of securing and expanding distribution for these brands in India, China, Japan, and South Korea plus the further expansion of the Cherokee brand in Europe and Asia.

On a conference call with analysts, CEO Henry Stupp said, “We are adding new licenses and product categories at an even faster pace than ever before as we expand Apex’s global reach. We are also establishing new revenue streams for our current portfolio, diversifying across geographies, customers, categories and consumer touchpoints, in addition to introducing our design services arrangement to numerous retailers, which is performing well.”

Stupp added, “Longer term, we are optimistic that the actions we are taking and the portfolio we are building will result in a bigger, stronger and more profitable Apex. In the near-term, however, we face some challenges consistent with the entire retail industry—namely, a softening U.S. retail environment and uncertainty surrounding Brexit—which have resulted in lower top-line growth. The actions we’ve taken to stabilize our financial position and refresh our business model have put us in a position to continue to expand the reach of the brands we own, the brands we create and the brands we elevate for others.”