‘88 May Slow Up Cherokee’s Record-Setting Sales, Profits

Recent smoke signals coming from Cherokee Group read like this: Although the company posted another record showing in fiscal 1987, don’t count on the same rate of growth this year.

Cherokee is a North Hollywood-based manufacturer and retailer of women’s casual clothing and shoes. Founded in 1973 by Greek emigrant James P. Argyropoulos, who remains chairman, the company for the past several years repeatedly has set records for sales and earnings. Its fiscal year ended Nov. 28 was no exception.

But fiscal 1988 is another matter. Argyropoulos, in releasing Cherokee’s results last week, said in a statement that the company looks for “a difficult retail environment” this year. However, he did not mention a slowdown in any of Cherokee’s product lines, and he expressed “guarded optimism” that the company is prepared to deal with any overall slowdown in retail spending.

Cherokee’s stockholders can only hope so. Even with Cherokee’s strong operating gains, its stock has taken a beating in recent months, pummeled by the stock market’s crash and persistent indications that consumer spending is waning.

Overall Slump

The stock, adjusted for a 2-for-1 split Feb. 26, hit a closing high last year of $24.25 Aug. 12, two weeks before the 5-year-old bull market hit its peak. Since then, Cherokee’s stock has tumbled 66%, closing Monday at $8.25 per share in national over-the-counter trading, as part of an overall slump in retail and apparel stocks that began even before the stock crash Oct. 19.

For example, the Gap, a San Bruno-based chain of casual clothing and jeans stores, saw its stock begin plunging in September because the company conceded that it might not match earlier earnings projections. The crash only exacerbated matters, and Gap’s stock ended 1987 down 43%.

Cherokee’s stock, too, “is fighting the total negativism or lack of interest in retail stocks generally,” said Thomas F. Caraisco of the investment firm Henry F. Swift & Co. in San Francisco. The worry from investors is that a slowing economy, or an outright recession, will develop in the months ahead, he said.

A drop in consumer spending can be a harbinger of a recession, as people delay purchases of cars, houses, stereos and other so-called durable goods that cost upwards of several hundred dollars. But a spending drop often is felt first in clothing stores, said Raymond S. Cowen of the Value Line Investment Survey, a stock research firm in New York.

‘Comparative Basis’

“Everybody needs clothes, but you’re talking on a comparative basis,” he said. “Maybe, if things are tough, they can get by buying one or two garments instead of the three or four they previously bought.”

Shoppers don’t appear to be cutting back at Cherokee so far. The company’s profit jumped 53% in fiscal 1987 to $10.4 million, or 83 cents a share, from $6.79 million, or 60 cents a share, in the previous year. Sales rose 34% to $139.6 million from $104 million.

In the fourth quarter alone, Cherokee said profit soared 40% to $2.28 million, or 17 cents a share, from $1.63 million, or 14 cents a share, a year earlier. Sales totaled $33.2 million, up from $24.6 million.

For Cherokee to suggest that a difficult year lies ahead doesn’t mean that it’s about to lose money. Given its growth record, instead of posting another 50% annual gain in earnings, analysts believe that Cherokee might have to settle for a 25% improvement--a gain lots of companies would gladly accept.

Caraisco predicts that Cherokee will earn $1 a share this year, up 20%. Edward F. Johnson of Johnson Redbook Services, a New York investment firm that specializes in apparel stocks, is looking for $1.07 a share in fiscal 1988, a 29% jump.

“They have good demand for their product and strong interest in their brand name,” Johnson said.

Argyropoulos and Robert Margolis, Cherokee’s president, were said to be traveling in recent days and were unavailable to elaborate on Cherokee’s outlook. Terrence J. Smith, Cherokee’s chief financial officer, did not return telephone calls requesting comment. But some of Cherokee’s recent actions indicate that it plans to keep expanding regardless of the apparent softness in the economy.

Chutes Purchased

Last month, Cherokee bought 80% of Chutes Corp., a Seattle-based importer and marketer of young men’s sportswear under the Code-Bleu trademark. Chutes’ sales for its fiscal year ended Sept. 30 were $33 million.

Also in January, Cherokee reached separate agreements with two Japanese companies to market the company’s shoes and its retail stores in Japan and other Pacific Rim markets.

At the moment, Cherokee has 20 company-owned or franchised stores in the United States, and it wants to sign up a total of 15 additional franchised outlets this year. By the end of 1990, the company wants 100 franchised stores operating nationwide.

Whether these expansion plans can overcome a sluggish retail market and bolster Cherokee’s stock remains to be seen.

But Argyropoulos himself has signaled his optimism about the stock. After the market crash more than halved the value of his Cherokee holdings to about $13 million, he promptly bought an additional 12,000 shares. At the same time, the company said it might buy up to 1 million, or about 8%, of its roughly 13 million shares outstanding.