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Edited Transcript of CHKE earnings conference call or presentation 13-Sep-18 8:30pm GMT

Q2 2018 Cherokee Inc Earnings Call

VAN NUYS Sep 20, 2018 (Thomson StreetEvents) -- Edited Transcript of Cherokee Inc earnings conference call or presentation Thursday, September 13, 2018 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

* Laura Bainbridge

ADDO Investor Relations - MD

* 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

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Presentation

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Operator [1]

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Greetings and welcome to Cherokee Global Brands Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Investor Relations.

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Laura Bainbridge, ADDO Investor Relations - MD [2]

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Thank you, and 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 web site at cherokeeglobalbrands.com.

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

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

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Thank you, Laura, and good afternoon, everybody. We want to thank you for your participation on today's call and your continued interest in and support of Cherokee Global Brands. As you know, it has been a very busy first 6 months of fiscal 2019. We entered the year with ambitious goals, restructure and realign our business operations, convert remaining indirect sales to licensing sales, true-up our financial and liquidity position, divest non-core assets and position our brands for future growth. I am very pleased to say that we accomplished each one of these goals, placing Cherokee Global Brands on solid footing as we head into the back half of the year. After Steve provides his financial update, I'll discuss the future direction of our core brands and expectations for growth.

I cannot stress enough how proud I am of the team and our Board of Directors. It was through their hard work and dedication that we were able to accomplish these meaningful objectives. I'd like to highlight our finance and accounting team in particular, who put in countless hours towards our financial restructuring that culminated in our successful debt refinancing in early August. To our new agreement with Gordon Brothers Finance Company and Gordon Brothers, we were able to replace our former credit facility in its entirety as well as increase the participation interest of our subordinated lenders.

The new facility increases our financial flexibility, adding over $5 million in liquidity, which will support the advancement of our strategic objectives. I would like to thank Gordon Brothers for working diligently and collaboratively throughout this process. The relationship with Gordon Brothers is a strategic one. Gordon Brothers has spent a lot of time in the branded apparel space, specializing in valuing, acquiring and investing in brands to help build value. In addition to potentially partnering our future brand acquisitions, they see an opportunity to partner in a way that builds our mutual-branded portfolios by leveraging our dual platform and portfolio business model.

Completing this refinancing on favorable terms marks a significant step forward for the company and our global licensing partners and, of course, our shareholders. We are now better positioned to realize the full potential of our high-growth brand opportunities with the support of this more focused and efficient infrastructure.

But the work doesn't stop here. In the second half of the year, we will continue to grow the reach and relevance of our brands through additional licensees and retail distribution. I will highlight several announcements in this front during today's brand review.

Our unique platform and pledge to think like a retailer continues to distinguish us in the marketplace. Not only are we able to maximize the product and marketing opportunities associated with each of our high-equity brands, but we're also able to create new brands with our capabilities in design, development and procurement of exciting new products for existing and new retail partners. This has never been more relevant as retailers seek to balance national brand recognition with the margin benefits and differentiation inherent with private brands. We as a company are uniquely positioned to support private label initiatives and firmly believe that the balance between private label and scalable established brands is the secret sauce needed to attract consumers.

While e-commerce continues to be a focal point, there is also a return to the store, particularly amongst generation Z consumers looking for brand experiences, which are legacy and heritage brands such as Cherokee, Hi-Tec, and of course, Tony Hawk, are all able to deliver. With this in mind, in the near future, we expect to provide details of new meaningful multiyear agreements with large-scale retailers that have tapped into our resources and product development infrastructures. With our 360-degree platform, our new partnerships will benefit from our innovative design vision, our agile sourcing and market gain approaches and our ability to scale brands quickly and efficiently.

And lastly, through the actions taken earlier this year, we enter the back half of 2019 with a more focused and efficient organizational structure that better positions us to scale our high-growth brands globally. Continuing to review our brand portfolio with an eye for identifying and divesting non-core assets will remain a strategic priority.

With this as a backdrop, I will now turn the call over to Steve to review our fiscal Q2 performance and discuss our outlook for 2019. Steve?

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

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Thanks, Henry, and good afternoon, everyone. Today, I'll discuss our second quarter 2019 and 6 months financial results as well as our fiscal 2019 outlook. I'll also provide an overview of our successful refinancing and new credit agreement with Gordon Brothers, including some details around our financial covenant.

Let's begin with revenues. As noted in today's release, revenues were $7.1 million compared to $7.9 million in Q2 last year. This $800,000 decrease was due primarily to the expiration or nonrenewal of several licensing agreements, including our DTR licenses for Tony Hawk and Liz Lange. Overall, last year's Q2 revenues from these terminated licensees and from exiting our Flip Flop Shops franchise business was $2.9 million.

To better understand the growth of our ongoing licensees, it's helpful to exclude the revenues from these terminated licensees to get an apples-to-apples comparison. Doing so, the growth of ongoing licensees is 42%. The growth came from increases in royalties from our Hi-Tec portfolio brand, which increased 34% or $800,000, and we earned royalties under new Cherokee license with Lidl, resulting in over $1 million of revenues this quarter. Note that royalties from Lidl don't repeat every quarter that are based on bulk production of Cherokee products by Lidl. Only one delivery was planned in our current fiscal year. We are very encouraged by this new partnership with Lidl and expect growth going into next year.

SG&A for the second quarter decreased by $2.3 million or 37% to $4 million compared to $6.3 million in the second quarter of last year. This decrease is primarily due to reduced spending for payroll, sales and marketing, lower professional fees and the elimination of temporary employees used last year as we integrated Hi-Tec.

During the second quarter, we undertook additional restructuring plans to improve our efficiency. We streamlined the organization and further eliminated redundant positions and unneeded facilities overseas and also concluded various consulting and marketing contracts, resulting in a onetime restructuring charge of $5.6 million. Many of these steps were taken earlier in the quarter so savings are already reflected in our second quarter results.

At this point, we're not contemplating any additional significant restructuring charges. We're able to support our sales and marketing efforts and we now have an efficient structure overall that we believe enables us to achieve our profitability goals.

The company has taken several steps over the past year to lower its overhead, including this quarter's restructuring plan and the plans implemented at the end of last fiscal year. To give you a sense of the year-over-year comparison, on a trailing 12-month basis, not including the effects of discontinued operations, our headcount is down approximately 35%. Last year's second quarter includes $1.8 million of business acquisition and integration costs related primarily to the Hi-Tec acquisition. These costs did not repeat in this year's second quarter.

You may recall from our previous announcement that we sold our franchise operations, Flip Flop Shops, back at the beginning of June. This resulted in a gain on sale of $600,000, which is separately reflected in our second quarter P&L. Including restructuring charge and the gain on sale of Flip Flop Shops, our operating loss from continuing operations for the second quarter was $2.4 million compared to $1.1 million in last year's second quarter. As Henry mentioned, we replaced our Cerberus credit facility with a new term loan from Gordon Brothers and subordinated promissory notes with 2 our major stockholders and CEO.

Terminating our previous credit facility resulted in some unusual items in our nonoperating expenses. Total interest expense of $2.4 million includes our normal LIBOR-based interest plus a repayment premium of $500,000, along with $300,000 of penalty interest that was paid while our loan was in default. In addition, a $3.2 million noncash charge to write off the remaining unamortized debt issuance cost is included in other expense.

At the income tax line, because of recent pretax losses, we are not accounting for any tax benefit for the pretax loss expected this year. And for certain foreign subsidiaries, we are continuing to provide deferred tax expense. The cash component of our income tax for the quarter was $300,000, but our overall tax expense was $1.1 million.

The net loss from continuing operations for the quarter was $9.1 million or $0.65 per diluted share on 14 million shares outstanding compared to $4.8 million or $0.37 per diluted share on 13 million shares outstanding in the prior year. Once again, comparability to the prior year is impacted by the restructuring charge incurred in the current quarter and the charges related to replace the Cerberus credit facility.

Now let's stop at this point and recap the impacts of items I've mentioned that are skewing our loss. There is the restructuring charge of $5.6 million, the onetime gain on the sale of Flip Flop Shops of $600,000 and there is the $4 million of nonoperating charges related to the refinancing. So combined, this is $9.0 million, and there's no impact on our income tax provision from these items for the second quarter or the 6-month period.

If you divide that $9 million by the roughly 14 million average outstanding shares, it equates to $0.64 per share. So as you can see, these items account for nearly all of our net loss for the quarter. You can find our definition of adjusted EBITDA in our 10-Q, so I won't repeat it now, but the onetime items I just mentioned are not included. So for the second quarter, adjusted EBITDA increased 97% to $3.1 million compared to $1.6 million in the prior year. This improvement is driven by SG&A savings, which more than offset the overall decline in revenues.

Now let's look at the results for the 6 months. 6 months revenues were $12.5 million compared to $14.7 million in the prior year, a $2.2 million decrease. As with Q2, this decrease resulted from the expiration or nonrenewal of several licensing agreements and existing our Flip Flop Shops business. Overall, the 6 months revenues from these terminated licensees was $5.6 million. Excluding these losses, revenues from ongoing licensees were up 37%. As with Q2, the growth came from increases in royalties from our Hi-Tec portfolio brand, which increased 44% or $1.7 million and our new Cherokee license with Lidl, which I mentioned earlier.

On the expense side, SG&A for the 6-month period decreased $3.9 million or 32% to $8.3 million compared to $12.2 million in the prior year. We spent less for ongoing payroll, sales and marketing, professional fees and temp employees. These results, again, reflect the impact our restructuring efforts.

The 6-month net loss includes, of course, the restructuring charge, the cost of exiting our Cerberus credit facility, the gain on sale of Flip Flop Shops and the tax effects mentioned earlier. The net loss from continuing operations, including these items, for the 6 months was $11.8 million or $0.87 -- $0.84 per diluted share on 14.0 million shares outstanding. That compares to $8.3 million or $0.64 per diluted share on 13 million shares outstanding. 6-month adjusted EBITDA was $4.1 million compared to $2.4 million in the prior year, an increase of 70%.

We ended the second quarter with $6.7 million of cash on hand. Our long-term debt totaled $49.9 (sic) [$49.1] million net of debt issuance cost, which includes $800,000 that is classified as a current obligation. Note that at the end of our last fiscal year, all of our long-term debt was classified as a current obligation.

On August 3, we replaced our former credit facility in its entirety, as Henry mentioned. We entered into a new financing agreement with Gordon Brothers Finance Company and Gordon Brothers, which includes the $40 million term loan. Also, the junior participants in our former facility exchanged their interest for a new subordinated promissory note, including an increase of $2 million from one of those subordinated lenders who's also a major shareholder. The new facility contains financial covenants, of course, but also provides flexibility regarding the management of our debt levels and liquidity. We have quarterly EBITDA targets to achieve beginning with the end of this year's third quarter, which had been reset based on our latest forecast. And we have a minimum cash threshold. One key difference to our former facility is that the new facility has a borrowing base. The value of our brand supports the term loan, so a decline in the value of our primary brands where they were this past August would impact the term loan. We are not anticipating declines, however, we're expecting growth.

There's also a covenant that we raise $2 million of junior capital by May 4, 2019. However, this would not be required if we achieve the specific level of working capital targeted at the end of the current fiscal year. There are other differences that are very important as well. First, we can dispose of our non-primary brands and keep 50% of the net proceeds. We plan to utilize this provision to deleverage going forward and increase our working capital. Second, we can raise up to $6 million in subordinated debt or equity and keep the cash. We would use this provision as necessary.

Now let's turn to our fiscal 2019 guidance. We're increasing the low end of our EBITDA guidance to a range of $8.5 million to $10.0 million. SG&A is now expected to approximate $16.5 million, that's down from $17 million previously. This is based on a narrowed revenue range of $25 million to $26.5 million.

In summary, we made very significant progress since beginning this fiscal year. We finished the consolidation and conversion of Hi-Tec to a licensee model, we streamlined our brand portfolio with the disposition of Flip Flop Shops, we've taken important steps to reduce our overhead and set the company up for profitable growth going forward as we leverage our reduced level of operating cost and we have successfully refinanced our credit facility with more flexible terms and we've improved our liquidity position. We believe our company is now in position to take advantage of the many positive opportunities ahead.

Now I'll turn the call back to Henry who will give us the brand update.

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

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Thank you, Steve. I will now turn to our brand highlights with a focus on how our brands are positioned to drive growth, not just in the second half of fiscal 2019, but in the quarters and years ahead.

I'll start with that Hi-Tec brand portfolio revenue of $3 million was up 34% year-over-year. We are pleased to offer the most comprehensive assortment of product, which now includes apparel and accessories and footwear in the brand's 40-year-plus history. Just last month, we anniversary-ed the European launch of our apparel and accessory lines offered to men, women and children. The overall sales has been favorable, consumer reaction has been very positive.

In Europe over the past year, we're also able to expand on the legacy athletic shoe business with the reintroduction of classic items from the Hi-Tec library. Hi-Tec's positioning at the cross-section of active outdoor and urban crossover is resonating particularly well for today's consumers. The lower investment of the Hi-Tec portfolio was advanced, which span from track and trail, service industry, urban crossover, has steered us towards the broadest assortment of products in the Hi-Tec brand history.

And importantly, we feel that we're just beginning to scratch the surface of the brand's total opportunity. We have, in concert with our licensees, secured pricing with all major global retailers, including leading department stores such as Liberty of London, where we launched a Hi-Tec shop-in-shop this past weekend, to national regional department stores, sports specialty stores and even financial retailers such as TSC. We ended the quarter with our ever increasing assortment of products offered to over 9,000 doors in over 100 countries in a growing e-commerce business. We have also developed a full structure shop-in-shop with several national retailers that are launching now or continuing to grow as we head into the back half of this year, starting in Europe and then expanding domestically.

Momentum is equally positive in domestic markets where we've continued to build distribution on the heels of our multi-category launch with Hi-Tec, footwear, apparel and accessories that is available in national and regional department stores, specialty retailers and of course, the sporting goods channel in addition to all major e-commerce sites. Once again, adoption and sales for the footwear, apparel and accessory collections continues to be very positive.

Our successful launch was supported by a fully integrated social marketing campaign that will be expanded to include a mix of in-store branding, digital influencer endorsements, sponsorships and promotions. We estimate the campaign thus far delivered over 40 million impressions to date, and we have targeted 140 million impressions by year-end. Consumer awareness of the Hi-Tec brand domestically increased 5% so far this year, surpassing other high-profile brands. Our initiatives to build upon Hi-Tec's brand heritage to offer a more comprehensive collection of apparel, accessories and footwear, is proving successful. In the quarters ahead, we look forward to building upon our track record in new markets, including Asia and Latin America, where we are in advanced discussions to expand all categories from footwear, to apparel, to accessories in these very important markets.

Also within our Hi-Tec portfolio, our Magnum brand delivered positive comparable sales in all international markets.

Turning our attention to the Interceptor brand, which continues to shine with our exclusive distribution agreement with Walmart led by category expansion, including accessory this fall, and geographic expansion into Canada. Based on the strength of our new licensees, we are optimistic for the brand's potential outside of our core footwear offering and throughout the rest of North America in Canada and Mexico, we look forward to making Interceptor-branded footwear available both in stores and online through Walmart's portfolio of e-commerce sites.

I'll now turn to the Cherokee brand. Our global revenue of $3.5 million was up approximately 10% in the second quarter. On the domestic front, we continue to navigate the transition to our wholesale licensing model, grabbing additional points of distribution through our new licensees and retail partners. At quarter end, Cherokee-branded product was offered in over 3,000 doors and growing across the U.S. and through an ever expanding e-commerce offering of custom storefronts.

Sell-through and online reviews in Walmart and Amazon were particularly strong as we head into the back half of the year. On that topic, we're pleased to announce that we've recently reassigned our school uniform business to [Eye Apparel]. Eye Apparel is an industry leader in the school uniform business and established extensive retail relationships throughout North America. We look forward to continuing to grow our reach and relevance in this very important category.

We also remain encouraged by the traction we are building in our boys and girls apparel category through our relationship with Stargate Apparel. Following the spring launch, we continue to increase the reach and penetration amongst key retail accounts.

As we think about the future of the Cherokee brand in the U.S., we will continue to pursue a multi-category and multichannel approach. Today, we offer an ever-expanding assortment of products across the broadest range of channels, retailers and licensees in our history. Partnering with best-in-class licensees will remain a core component of our future growth strategy as we are pursuing direct-to-retail and third party licensing deals. Retail interest is picking up, and we're focused on continuing to expand our reach into all distribution tiers with exciting products that benefit from the reach of the Cherokee brand's 40-plus year history.

In the international market, we continue to deliver double-digit sales growth, led by particularly strong sales in Mexico, India and South America. In Europe and Scandinavia, men's, women's and children's apparel, footwear and accessories are now hitting the shelves in over 10,000 retail locations in over 25 countries. Initial customer reaction has been very positive, and we're optimistic about our prospects within this progressive, high-growth retail.

And lastly, I'll review our Tony Hawk brand where revenues has declined significantly as we transition from our legacy DTR partner to our new wholesale licensing base. Second quarter revenue was $0.1 million, a decline of approximately 90% on the prior year period. The year-over-year revenue decline continues to reflect the transition of our wholesale business in North America. While disappointing and challenging, our core wholesale licensees are ramping nicely for the future. New licensees are being added, and we're expecting to see broad expansion in the back half of this year.

However, our brand momentum is building, and Tony Hawk remains an active figurehead for the brand, particularly among social media channels. We're seeing stronger interest among perspective retail accounts who love the brand, and we are rapidly scaling our e-commerce presence in Amazon and Walmart.com. Ongoing category expansion will also remain a driver for future growth. In Europe, we're excited to build upon our relationship with the Batra Group, a pan-European licensee for men's and boy's apparel and accessories. With product development for calendar spring -- spring 2019 launch completed, we're seeing strong interest among prospective retail partners throughout Europe. Our partnership with Batra, we will seek multi-tier distribution strategy targeting retailers in which Batra maintains long-standing relationships.

And outside of Europe, we continue to pursue opportunities for growth in key international markets, including Japan and Korea. Enthusiasm for skateboarding culture in these markets is strong, aided, no doubt, by the inclusion of skateboarding in the 2020 Olympics to be held in Tokyo. We will continue to pursue distribution opportunities through licensee relationships, direct-to-retail and third party licensing agreements to ensure strategic alignment between licensee, retail and brand owner. We look forward to making future announcements on this front.

To summarize, during the first half of fiscal 2019, we successfully concluded the debt refinancing with a like-minded strategic lender that will enable us to scale our business, we improved our liquidity, we divested noncore assets, we significantly reduced our SG&A, we completed our restructuring, thereby significantly reducing our run rate, and we're expanding our licensing network through addition of new blue chip licensees. Distribution is expanded, and we have all core brands being sold on all growing e-commerce websites, including Amazon and Walmart.

In the back half of fiscal '19, we remain focused on finalizing several new core licensees to balance our product assortment for a key brand, including a relaunch of the Cherokee heritage ladies footwear business; a dramatic expansion of Hawk distribution, which is showing excellent signs of future growth; the finalization of additional private label development for new partners and existing partners that wish to tap into our unique 360-degree platform and the expansion of our leader relationships through the introduction of other brands in our portfolio. We also intend to continue to divest noncore assets to remain focused on high-growth revenue opportunities and reduce our debt.

Once again, I'd like to thank the team for their continued hard work and dedication through a very difficult period. Together, we will work towards a bright future for Cherokee Global Brands. And to our shareholders, we thank you for your support throughout this process. We look forward to keeping you updated as we move into the future. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Eric Beder with Small Cap Consumer Research.

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

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By the way, congrats on the quarter, a lot of positives there. When we should think -- when you're talking about private label and doing that for other person, how should we think about that? Is that going to be done in kind of the same format that you have with the licensing in a sense that there's not going to be inventory risk or markdown risks? How should we think about that business model as running in tandem with the other ones you have?

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

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So it's -- we have several retailers that have approached to us over the years to design and develop brands that they already own. The Point Cove co-relationship with Reliance was built on their desire for us to create a brand for them. Now that, that brand is starting to gain some traction, and we were able to do it using our existing infrastructure, we started to explore new revenue opportunities using the existing platform, our existing product development and design team, to retailers that have decided to look at other options to develop their own private label products. It follows the same philosophy, no inventory, no margin guarantees, we don't make the ultimate purchases here. But what we can we deliver to our retail partners is a fully designed line architecture, a fully designed pricing architecture that's relevant to their specific market. In order to do so, we are negotiating longer-term deals with these retailers that are subject to minimum guarantees based on their purchases. So there is a requirement to buy. So we're not just developing product in the hope that we will generate royalties.

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

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Okay. Tony Hawk. So piece of Tony Hawk that are with Walmart right now, Canada, I believe, and in Mexico, how have they done? And when you look at Tony Hawk in the U.S., obviously it's moved from Kohl's like it's anniversary-ed, I believe, Q3. How should we be thinking about the U.S. opportunities there?

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

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Our wholesale licensee had a good period selling in for the back half of the year. We've expanded the account base quite a bit. These transitions are difficult as we saw in our second quarter domestic results as we transition from a former partner. We are finding -- well, we do believe long term the transition on Hawk will be an easier transition than what we experienced with Cherokee because of the nature of the categories picking up steam. We also have Tony Hawk, who we closely collaborate with as a strong advocate for the brand. And then just the general positive view about skateboarding, skateboarding culture at the Olympics, the more active lifestyle that people are leading today. And frankly, the strength of our licensees, which are quite good. They put a lot of effort into building more product, investing in inventory, which is critical as we introduce a brand from old partners to new partners, we know that our licensees have to take an inventory position to be able to respond quickly and secure initial placement and then have an ability to backup with future orders. The product that has been put into the market has performed well. Although, the numbers are small, we are seeing positive sell-throughs, we're getting positive reviews in Amazon and Walmart, and we are picking up customers every month now plus we are adding additional licensees on a regular basis and we'll be making announcements of several new licensees in the short term -- near term.

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

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Stepping back from what's going on here, you've seen a lot of shift. The DTR business appears to be on the ropes pretty much. Is the DTR business pretty much done? Are we now having to change the whole paradigm, like you guys you're doing at some respects with Tony Hawk and Cherokee, is that how it's going to be going forward?

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

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I think the real answer is, there is no longer 1 solution, there is no cut-and-paste answer. I think that DTR is an important tactic for certain brands in certain markets, but it is not the full solution anymore. Retail has clearly domestically shifted a lot of their DTR relationships and in fact, their brand relationships to private label. We are selling to see a shift back because like anything, people reach too far in one direction and have to circle back a little bit and have more of a balanced portfolio. We are also frankly seeing a return to the store. And I will tell you that younger generations are very upped to socialize and buy in-store. And we're finding brick-and-mortar stores are starting to express an increased interest in solid brands, brands with a history, so we're similarly returning to the brands domestically. Internationally, we found that DTR is a really good solution, particularly, in countries where we don't -- the retailers don't possess full design capabilities or sourcing infrastructures. And our platform allows them to tap into newly developed product with their supply stream that's been fully vetted. So our solution is quick and agile to these retailers. So I think the future is going to be about a combination of our ability to embrace the private label movement as it happens through our disciplines in our platform to deliver DTR and also to deliver a wholesale model. All have benefits, all have risks associated with them. But we think that a careful balance between all 3 routes is what's required for the future.

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

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Okay. Lidl, you're off to a great start there. How should we be thinking about the flows? You mentioned that, I guess, obviously this is the initial ramp up. Is this going to be kind of a lumpy set of flows as we go forward?

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

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Yes. it's going to be lumpy. And the approach we took is very SKU intensive. It's going to start hitting the floors the next few weeks. We are obviously very excited. The product looks great. The advertising and marketing that they put behind it, which will be launching the next weeks, is very strong. It's very comprehensive placement. They will then do a read on the performance. They'll go into some strong analytics, by size, by product category, by gender. And that will allow us enough time to develop the future sets. Our goal is to partner with them, not only on our namesake Cherokee brand, but we are starting to explore additional opportunities with them for other brands in our portfolio in addition to an opportunity to develop products for them using our resources.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [10]

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And is there many major market in Europe that they are not physically around that offer opportunity still?

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Henry I. Stupp, Cherokee Inc. - CEO & Director [11]

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No. They are in 15,000 locations or spread to about 27 countries and growing. So they are pretty much from Western Europe, all the way through Central and Eastern Europe and Scandinavia.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [12]

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Okay. And one last one for Steve. You know the debt is under control and you have the ability to start using some cash flow, pay it down. What should be -- what should we be start thinking about as the goals for the debt coverage off of EBITDA or net debt and other pieces?

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Steven L. Brink, Cherokee Inc. - CFO [13]

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So I think the focus now, like you said, is to deleverage going forward and we'll see the extent to which that is achievable. I think we need to obviously get the leverage down, it's higher than we had planned. So the company had planned at least, so it needs to come down more of that today. The question is how far. And I think that will be a combination, of course, as you know, about earnings growth and operations improvement next year. We think we have the right infrastructure in place now in terms of SG&A, then we'll be able to leverage that going forward and add revenue growth without necessarily more infrastructure. So that's the good part of it. And I think you'll start to see positive free cash flow sometime at the end of next fiscal year.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [14]

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And actually to come back to that. How much -- how you've done a significant job of cutting back on infrastructure? How much will you have to grow and leverage that before you have to start adding material pieces? Obviously, it's getting acquisitions or...

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Steven L. Brink, Cherokee Inc. - CFO [15]

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Right. Our existing licensee base and brands, we did grow significantly without adding infrastructure. Like I mean, there's no reason to grow it at all at this point to support existing brands. So adding a brand, of course, would change it. Some of the things that we're talking about in terms of design services, that might require some cost, but we'll look at that strategically going forward on a case-by-case basis. But there is -- the only thing we would want to build, and to the extent going forward is if we had room, is to do digital marketing. As you know, there's a non-satiable appetite for marketing and e-commerce and that sort of things, that will be the only place, but that would be completely discretionary.

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Operator [16]

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There are no more questions at this time, and this does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.