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Cherokee Inc. Reports Operating Results (10-Q)

September 08, 2010 | About:
10qk

10qk

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Cherokee Inc. (CHKE) filed Quarterly Report for the period ended 2010-07-31.

Cherokee Inc. has a market cap of $155.5 million; its shares were traded at around $17.64 with a P/E ratio of 13.5 and P/S ratio of 4.8. The dividend yield of Cherokee Inc. stocks is 8.6%. Cherokee Inc. had an annual average earning growth of 2% over the past 10 years.CHKE is in the portfolios of Jim Simons of Renaissance Technologies LLC, Chuck Royce of Royce& Associates.

Highlight of Business Operations:

Tesco s U.S. dollar based retail sales of merchandise bearing the Cherokee brand, which included the U.K., Ireland, the Czech Republic, Slovakia, Poland, Hungary and Turkey, were $113.1 million in our Second Quarter compared to $182.3 million in the second quarter of last year, representing a total decline of 37.9%. Approximately $33.0 million of the total $69.2 million decline was from Tesco s Central European territories, with the UK accounting for a $35.1 million decline, representing nearly all of the remainder. The primary reason for the current retail sales declines at Tesco is the reduction in inventory levels of Cherokee branded goods. In addition, there was a strengthening of the U.S. dollar in nearly all of the Tesco territories, ranging from 3% to 12.5% in the Second Quarter as compared to the comparable period last year. Retail sales in the United Kingdom, as measured in British Pounds Sterling, were down 26.2% in the Second Quarter as compared to the comparable period in the prior year. Hence, retail sales in U.S. dollars for the United Kingdom totaled $76.4 million in the Second Quarter, as compared to $111.5 million in the second quarter of last year. The decline in retail sales in the Tesco Central European countries of the Czech Republic, Slovakia, Poland and Hungary, as measured in their respective local currencies, ranged from 44% to 54%. Additionally, currency rate fluctuations in the Central European countries, which reflected the stronger U.S. dollar in the Second Quarter, exhibited unfavorable changes ranging from 3% to 12.5%, and as a consequence the collective U.S. dollar based retail sales from Tesco Central Europe for the Second Quarter were $28.4 million, as compared to $61.5 million in the second quarter of last year.

Royalty revenues were $7.5 million and $15.7 million during the Second Quarter and the Six Months, respectively, compared to $8.1 million and $17.0 million during the comparable periods last year, a decrease of 7.4% and 7.3%, respectively. Royalty revenues from the Cherokee brand were $6.6 million and $13.8 million during the Second Quarter and Six Months, respectively, compared to $7.4 million and $15.4 million for the comparable periods last year. During the Second Quarter and Six Months, revenues of $2.7 million and $6.5 million, respectively, were recognized from Target Stores compared to $2.7 million and $6.9 million for the comparable periods last year, which accounted for 36% and 42% of our total revenues, in the Second Quarter and the Six Months, respectively, versus 34% and 41% last year. The decrease in royalty revenues from Target Stores for the Six Months compared to the comparable prior year period was attributable to a difficult retail environment and also lower inventory levels of Cherokee branded products during the Six Months, as compared to the comparable period of last year. During the Second Quarter, the retail sales of Cherokee product declined 3.9%, but due to a slightly higher average royalty rate, the royalties from Target for the Second Quarter were the same as the prior year period.

Revenues from Zellers were $381,000 and $774,000 during the Second Quarter and Six Months, respectively, compared to $280,000 and $534,000 for the comparable periods last year, due primarily to higher sales volumes and the utilization of the Cherokee brand on a greater number of kids product categories. Royalty revenues from our retail direct licensee in Mexico, Comercial Mexicana, totaled $175,000 and $333,000 during the Second Quarter and Six Months, respectively, as compared to $152,000 and $302,000 in royalty revenues for the comparable periods last year. The increase in royalties from Comercial Mexicana for the Second Quarter and Six Months was due to greater retail sales and slightly favorable exchange rate differential, as compared to the comparable periods last year.

Selling, general and administrative expenses for the Second Quarter and Six Months were $3.36 million and $6.73 million, respectively, or 44.9% and 42.8%, of revenues, in comparison to selling, general and administrative expenses of $3.35 million and $6.5 million, respectively, or 41.3% and 38.1% of revenues during the comparable periods last year. Our selling, general and administrative expenses of $3.36 million in our Second Quarter were approximately $17,000 greater than last year, and exhibited the following positive and negative variances: (i) lower travel expenses as compared to the second quarter of last year; (ii) lower bonus accrual expense of $0.6 million as compared to $1.8 million in the second quarter of last year; (iii) higher payroll and related expenses (due to a higher headcount); and (iv) higher marketing, advertising and related expenses, as compared to last year. The increase in our selling, general and administrative expenses of $0.3 million during the Six Months was primarily attributable to the following positive and negative variances: (i) higher marketing, advertising and related expenses as compared to the comparable period last year; (ii) lower bonus accrual expense of $1.0 million as compared to $1.3 million last year; (iii) higher salary and payroll related expenses as compared to the first six months of last year (due to a higher headcount); and (iv) higher legal expenses versus the comparable period last year.

During the Second Quarter and Six Months we recorded a tax provision of $1.7 million and $3.6 million, respectively, which equates to an effective tax rate of 40.0% and 40.1% for such periods, compared to $1.9 million and $3.8 million and an effective tax rate of 39.7% and 36.5% recorded for the same periods last year. We are making quarterly estimated tax payments for our federal and state income tax liabilities. During the Second Quarter and Six Months our net income was $2.5 million and $5.4 million, or $0.28 and $0.61 per diluted share, respectively, compared to $2.9 million and $6.7 million or $0.32 and $0.76 per diluted share for the comparable periods last year.

During the Six Months, cash provided by our operations was $4.8 million, compared to $4.2 million for the comparable period last year. The cash provided by operations of $4.8 million during the Six Months was primarily due to net income of $5.4 million offset by the changes in: (i) accounts receivable, which decreased by $245,000 in the Six Months, as compared to an increase of $2.0 million in the comparable period last year; (ii) accounts payable, which increased by $339,000 in the Six Months, as compared to an increase of $25,000 in the comparable period last year, (iii) accrued compensation, which decreased by $1.5 million in the Six Months, as compared to a decrease of $1.6 million in the comparable period last year; (iv) a decrease of income taxes payable of $0.8 million, as compared to an increase of $0.1 million in the comparable period last year; and (v) a slight increase in income taxes receivable for the Six Months, as compared to an increase of $0.3 million in the comparable period last year. In addition, our cash from operations includes non-cash stock-based compensation expense of $269,000 pursuant to SFAS 123 (R) as compared to $317,000 in the comparable period last year, and our deferred tax assets decreased by $136,000, as compared to a decrease of $218,000 in the comparable period last year.

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10qk
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