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Edited Transcript of CHKE earnings conference call or presentation 18-Jun-19 8:30pm GMT

Q1 2019 Cherokee Inc Earnings Call

VAN NUYS Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Apex Global Brands Inc earnings conference call or presentation Tuesday, June 18, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henry I. Stupp

Cherokee Inc. - CEO & Director

* Steven L. Brink

Cherokee Inc. - CFO

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Conference Call Participants

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* Eric Martin Beder

Small Cap Consumer Research, LLC - CEO & Consumer Analyst

* Kimberly Esterkin

ADDO Investor Relations - Director

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Presentation

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Operator [1]

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Greetings, and welcome to the Cherokee Global Brands First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin, Director, Investor Relations.

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Kimberly Esterkin, ADDO Investor Relations - Director [2]

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Thank you, good afternoon. Speaking today will be the company's Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Steve Brink.

Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. Forward-looking statements are neither a prediction nor a guarantee of future events or circumstances and are based on currently available market, operating, financial and competitive information and assumptions.

Our actual results could differ in a material manner from those expressed in such forward-looking statements for any reason, including those listed in the company's SEC filings. The company assumes no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results.

Further, this conference call includes a discussion of non-GAAP financial measures as the term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the company's website at cherokeeglobalbrands.com.

And with that, I'll hand the call over to Cherokee Global Brands Chief Executive Officer, Henry Stupp.

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Henry I. Stupp, Cherokee Inc. - CEO & Director [3]

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Thank you, Kim, and good afternoon, everyone. We appreciate your support on today's earnings call. As we complete the first quarter of fiscal year 2020 and enter into the second, we remain focused on delivering on our pledge to think like a retailer and connect with consumers. Even as retailer strategies diverse significantly from the past in order to establish new and diversified revenue streams, our ability to diversify our portfolio across geographies, customers, categories and consumer touch points along with our focus on driving profitable growth led to a 14% improvement in adjusted EBITDA and a 12% decline in SG&A year-over-year.

And while our bottom line performance continues to improve due to cost-saving measures, our royalty revenue for the quarter was somewhat lighter than anticipated, taking into effect nonrenewed or expired licenses and the divestiture of Flip Flop Shops.

With that said, we've decided to adjust our guidance for the fiscal year. Although we now have stronger control of our expenditures and profitability than ever before, macro forces, mainly the threat of tariffs and Brexit, have resulted in lower top line growth. We think it prudent, therefore, to revise our guidance at this time and are lowering our revenue and EBITDA estimates for the fiscal year.

Steve will get into the specifics later in the call. Despite these market conditions, from an operational standpoint, Cherokee Global Brands continues to benefit from the combination of our portfolio of high-equity brands and our platform of capabilities that leverages our design services model into new revenue streams. Our unique 360-degree platform positions us as a full-service resource for each of our retail and wholesale licensees. In addition, our recent shift from a direct-to-retail licensing model to one that encompasses wholesale and retail licensing partnerships enables us to grow our own brands and create and develop brands and products for others. We've recently introduced these new revenue streams, and we are in advanced discussions to expand our design service relationships into numerous markets with the leading retailers.

From a strategic perspective, as we continue to grow and enhance Cherokee Global Brands for future success, we have begun to add new skill sets to our Board of Directors. In the beginning of May, we announced the appointment of Patti Johnson as Chair of our Audit Committee. Patti's prior experience managing the financial and accounting operations for large global retail operations, such as Charlotte Russe and Old Navy, has proven to be a strong addition to our team in her short tenure on our Board. Then just last week, we were thrilled to announce the appointment of current director Evan Hengel as Chairman of the Board. Evan has been a member of Cherokee's Board of Directors since October 2018 and has extensive business and financial experience, including M&A and restructuring in the apparel and consumer industries, has and will continue to significantly contribute to our Board.

And last, but certainly not least, from marketing and branding perspective, as I mentioned last quarter, at the end of June, we are excited to reconfirm that Cherokee Global Brands will officially be rebranded as Apex Global Brands. Towards the end of June, Apex Global Brands will begin trading on NASDAQ under the ticker symbol APEX, A-P-E-X.

At that time, we shall transition from Cherokee Global Brands to Apex Global Brands both in name and ticker symbol as we mark the expansion of our brand portfolio from a mono-branded company to a house of high-equity lifestyle brands and we leverage our platform synergies and position ourselves as a true thought leader in the global expansion of our brands and services.

Leveraging the unique Apex platform, our own brands will be able to grow into new categories and markets without limitation. At the same time, our retail partners and licensees will be able to expand their global reach and relevance as our retail and licensee partners are now collaborating to market a vastly expanded assortment of products. We believe that our shareholders will witness the transformation of our company into a streamlined organization that can leverage our current and future brands' distinct strength to reach new levels of profitability. We believe we are heading in the right direction, cutting cost to improve shareholder returns, appointing key individuals to strengthen our strategic direction and rebranding to reflect the changing world of retail.

We are now better positioned to deepen our relationships with retailers and help our partners deliver more product and introduce new categories faster than ever before. I am optimistic about our future and look forward to continuing to sharing our progress.

Before discussing our brands further, I'd like to hand the call over to Steve Brink, our CFO, to review the first quarter 2020 results and updated financial guidance. Steve?

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Steven L. Brink, Cherokee Inc. - CFO [4]

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Thanks, Henry, and good afternoon, everyone.

Revenues for our first quarter were $5.1 million compared to $5.4 million in the prior year's first quarter. This 6% decrease is primarily due to the expiration of the Cherokee brand license in South Africa as well as our divestiture of our Flip Flop Shops franchise business in June 2018. In Q1 last year, we had approximately $800,000 of revenue overall from nonrenewed licenses and the Flip Flop Shops business that we sold. Excluding these items, our organic revenue growth was 9% for the quarter.

As Henry noted, first quarter product sales with our licensees in Europe were hampered by the economic uncertainty surrounding Brexit. We think this trend may continue in the future quarters. People are also concerned about the impact of potential higher tariffs on apparel and footwear if United States enact the announced 25% tariff on goods produced in China, commonly known as Tranche 4.

We believe our licensees are being proactive to reduce their exposure to higher tariffs by moving production to countries that aren't exposed to these tariffs and by negotiating lower costs with existing suppliers. However, it's possible that if these tariffs are enacted, prices may increase in our branded products being sold in United States. In turn, this could result in lower retail sales and lower royalty revenue to us.

Now back to our results for the quarter. The overall decline in royalty revenue in the first quarter was partially offset by revenue from our new design services agreement in China. This agreement continues to demonstrate the value of our product development capability. Also on a positive note, we continue to see the beneficial effects of our restructuring efforts in our operating expenses this quarter. On a year-over-year basis, our ongoing SG&A expenses were down 12% in the first quarter, while our adjusted EBITDA increased 14%.

Total interest expense for the quarter was $2.2 million compared to $1.7 million in the prior year. This increase was primarily due to our increased debt level along with higher noncash interest charges related to our new term loan. Again, this is not all cash interest. Our interest expense includes $1.6 million of cash interest plus $600,000 of noncash charges for the amortization of deferred financing cost.

Our income tax expense also includes noncash component. We generated net operating losses in the quarter in both the United States and Europe, and we're not recognizing the benefits of these NOLs in our income statement because of previously established valuation allowances. The result is that we have noncash tax expense reflected in our income statement, which totaled $300,000 for the quarter. Cash taxes were also $300,000 for the quarter. Our operating profit for the quarter was $600,000 compared to an operating loss of $200,000 in the first quarter of the prior year. Excluding the onetime and noncash items, our adjusted EBITDA was $1.2 million for the quarter, a 14% increase from $1.0 million in the first quarter of fiscal 2019. This improvement was driven primarily by lower SG&A combined with the organic growth of our ongoing licensees.

Now let's review liquidity. We ended the quarter with $1.7 million of cash on hand. Our long-term debt totaled $54.8 million net of debt issuance costs. $1.4 million of this obligation is current. One of our lenders who was issued stock warrants when we refinanced our credit facility back in August 2018 exercised their warrants in the first quarter. This resulted in $600,000 of cash proceed.

Now let's turn to guidance. As Henry noted, we are revising our guidance for fiscal 2020, which for us will end on February 1, 2020. We've changed our revenue expectations for the balance of the year taking into account the continued uncertainty surrounding Brexit and the potential impact of higher tariffs going forward. We've also taken steps to further reduce our SG&A in the upcoming quarters compared to our previous expectations. We now anticipate revenues to range from $24.5 million to $26.5 million, SG&A to range from $14 million to $15 million and adjusted EBITDA to range from $10.5 million to $11.5 million. This guidance indicates revenue growth up to 8% for the full year and EBITDA growth ranging from 7% to 17%.

As you probably know, NASDAQ requires our share price to be over $1. Our shares haven't traded over $1 recently, and we've now passed the time frame that we had for us to regain compliance with this bid price rule. There's been some activity lately in this regard. Our shareholders approved last week a reverse stock split that our Board of Directors can implement, if necessary, to achieve a $1 stock price and remain on NASDAQ. But our 1-year compliance window expired before that could happen and NASDAQ invite us on June -- advised us on June 5 that our stock would be delisted unless we appealed that decision. We did file an appeal and expect to present our plan to regain compliance with NASDAQ Appeals Panel. Because we filed an appeal, NASDAQ will defer any delisting action until a hearings panel hears our case and makes a decision. You can find additional details regarding these requirements in our 10-Q that was filed this afternoon.

Now I'll turn the call back to Henry to add more color regarding our results.

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Henry I. Stupp, Cherokee Inc. - CEO & Director [5]

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Thank you, Steve.

I'll now provide some highlights on our core brands for the first quarter of 2020. Starting with the Hi-Tec portfolio, which comprised 50% of our total revenue for the period. The Hi-Tec brand portfolio, which includes Hi-Tec, Magnum, Interceptor, 50 Peaks, achieved revenues of $2.5 million for the quarter, down only slightly from $2.6 million in the prior year.

Although revenues in Europe for the quarter were impacted by the economic uncertainty related to Brexit, we're today marketing an expanded range of apparel, footwear and accessories sold by department stores and major sporting goods and specialty retailers globally. Outside of Europe, distribution of Hi-Tec branded footwear, apparel and accessories in Latin America and Asia are in the early stages but growing.

We look forward to exploring category expansion opportunities as we scale the brands in these regions. Through our licensees' efforts, we have recently expanded our footprint in Asia with new distribution partners in China and South Korea, and we will continue to expand the Hi-Tec portfolio in Asia, Latin America and India in the coming months.

We're also seeing positive results with the Magnum branded footwear, and we are adding new product categories, such as apparel and accessories, to expand our product assortment. Magnum is one of the world's fastest-growing military, tactical and service industry brands. We will continue to increase awareness for Magnum through marketing activation and new licenses in the coming months. Our exclusive distribution agreement with Walmart in North America continues to drive success for Interceptor, and here too, category expansion will be key to growth. As I noted last quarter, we are in discussions to expand Interceptor globally in footwear, apparel and accessories in early fiscal 2021.

And now I'll turn to the Cherokee brand, where sales of $1.5 million were down approximately $0.6 million year-over-year, largely due to the nonrenewable expiration of legacy partners along with our transition from direct-to-retail to a wholesale licensing model. As legacy relationships are replaced and business models shift, we know that a sustainable growth plan exists for the Cherokee brand domestically. Nevertheless, this will take time and we, along with our best-in-class licensees, are committed to making this happen. Today, we have a wide assortment of Cherokee men's, women's and children's products across multiple channels, retailers and licensees. Our licensees' expertise and commitment to the Cherokee brand will be key to our growth strategy, and therefore, it's all progressing, particularly for Cherokee Kids and School Uniforms. As we expand distribution to new channels and with new partners and leverage our new Apex platform, we look forward to realizing positive comps for the Cherokee brand in the future.

On the global front, we continue to identify additional licensees to build upon our European base. We continue to pursue multicategory, multichannel approach for our global retail partnerships, including new licensee partnerships in Japan, China and continued expansion in Europe. Partnering with best-in-class licensees will remain a key aspect of our growth strategy.

Our sales and marketing efforts are gaining traction for our portfolio brands, including new licenses and distribution for Everyday California. Recently, we have signed a long-term license with Chedraui in Mexico and our domestic licensees secured placement with key retailers. We're also in discussions to secure new licensees for both Liz Lange and Sideout. And lastly, I'll review our Tony Hawk brand, which now includes our streetwear lifestyle brand Tony Hawk Signature.

With the transition from our legacy direct-to-retail model to a wholesale licensing base, we expect positive future results over the coming quarters, where relatively newer core wholesale licensees are focused on building brand momentum and securing placement with the leading retailers in Europe, Asia, Australia and of course, North America.

The actions we've taken to stabilize our financial position and refresh our business model have put us in a solid position to expand reach for the brands we own, the brands we create and the brands we elevate for others as well into the future. Our transition to Apex Global Brands in the coming weeks represents natural evolution for our company. We're entering this new chapter with an operational model that is stronger and a business model that is more balanced and diversified than ever before.

Thank you, again, for your time. We'll now open up the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Eric Beder with SCC Research.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [2]

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Could you talk a little bit about the expansion online? What are you seeing internationally? And how are you going to leverage that going forward?

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Henry I. Stupp, Cherokee Inc. - CEO & Director [3]

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All of our major retailers have an online presence. So there -- whether it's through Urban Outfitters or Foot Locker in Europe or Amazon and Walmart domestically, we have our brand online and in-stores, so today we're looking at it as one channel retail. In the past, people called it omnichannel, but today, we're viewing it as retail with everybody having an online component.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [4]

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And what -- when you look at the brands, you've taken a pretty conservative tact in terms of Brexit and tariffs, where do you think -- looking kind of multiple years ago, which brand has the biggest potential in Europe going forward? Which brand should we be thinking about in terms of that?

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Henry I. Stupp, Cherokee Inc. - CEO & Director [5]

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In the near term, we say both Hi-Tec and Magnum, that's part of the, what we refer to as the, Hi-Tec portfolio, has the fastest growth through the introduction of both new categories and new markets.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [6]

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And final question. When we look at the expansion prospects here for some of the brands you mentioned, Everyday California, Sideout and some of the -- Liz Lange, are those -- I would assume given where you are in those and some of the newer ones, that we should start thinking about those as more 2020 potential revenue events. Is that how should we focus them? Or can they have a chance to do something here in 2019?

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Henry I. Stupp, Cherokee Inc. - CEO & Director [7]

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With Everyday California, we'll see revenue starting in Q2 this year. And both Liz Lange and Sideout, we're looking more as a fiscal '21 project. And just to get back to your other question. In terms of near term, Eric, in addition to the Hi-Tec portfolio, we believe our design services will expand as we move into the future. We've already got a significant partnership in China, and we're talking to other potential parties in both Europe and domestically. So we think that's an important part of our future business. We have the staff and the resources to manage it without a significant SG&A buildup. So we are looking at expanding that. And we have been approached by numerous parties to tap into it. So we've had some good success so far, and we think it's a good opportunity for us to balance out our revenue streams.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [8]

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When you look at the China opportunity here, where do you think -- are you in pretty much would you say the first 1 or 2 -- first innings of that? And the potential to expand that across, is it relatively seamless to be able to expand that to, to your point, Europe or other places in Asia?

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Henry I. Stupp, Cherokee Inc. - CEO & Director [9]

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Yes. We've already been approached by affiliates of the existing partner in China, particularly India and Japan. We'll see how that progresses. Separately, we've established relationships with some European retailers for existing brands who are looking to tap into our service model. So it's a combination of both.

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Operator [10]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.