Cherokee Copes With Huge Debt : Buyouts: Sharply higher sales are helping the Sunland apparel maker, but Cherokee says it can keep paying down its debt even if its sales slow.

Even for Cherokee Group, a Sunland apparel company that is accustomed to rapid growth, the last six months of 1989 were sparkling.

Sales shot up 30% from a year earlier, to $92.3 million. Cherokee’s profit from operations--before taxes and interest payments on its debt--nearly tripled from a year earlier, to $12.2 million for the six months ended Dec. 2.

Yet Cherokee still reported an overall loss of $194,000. Why? Because the company is operating under a $160-million mountain of debt--most of which is junk bonds--that an investor group took on when it bought Cherokee for $174 million in a leveraged buyout last May.

The junk bonds, which raised $100 million for Cherokee, were sold by the investment firm Drexel Burnham Lambert, the former junk-bond giant that collapsed last month. The rest of Cherokee’s debt is from various bank financing.

Although Cherokee is now a privately-owned company, the bonds were sold to the public, so Cherokee is still obligated to file its financial results with the Securities and Exchange Commission. The results show Cherokee’s interest on its debts in the last half of 1989 totaled $12.7 million--up from $20,000 a year earlier and equal to the biggest net profit in the company’s history, in its fiscal year 1988.

But executives of Cherokee, which specializes in selling women’s sportswear to retailers, aren’t panicking. Although it showed a net loss, Cherokee generated more than enough cash from its business during the year to cover the debt payments, they said.

Moreover, the executives said they are confident that Cherokee can easily maintain its debt payments even if the company’s sales go flat. “With no growth, we would have no problem meeting our debt obligations in the next three years,” said Cary D. Cooper, Cherokee’s executive vice president and chief financial officer.

Not that Cherokee is invincible. The company had operated about a dozen retail stores of its own--including outlets in the Sherman Oaks Galleria and the Topanga Plaza in Canoga Park--but recently shut them down because they weren’t profitable, Cooper said. Several franchised Cherokee stores also have closed.

The stores were never big contributors to Cherokee’s overall business; their best year was in fiscal 1987, when Cherokee’s own stores kicked in $3 million, or 2%, of its $140 million in total revenue that year.

Cooper declined to explain why the stores failed. But Cherokee’s decision to close them sent a clear signal: The enormous debt is Cherokee’s first concern, and the company won’t tolerate any cash drain that impairs its ability to lower that debt.

“Right now they’re OK,” said Angela Uttaro, who follows Cherokee for the bond-research firm Standard & Poor’s Corp. in New York. If Cherokee’s growth stalls, the company will “be able to go for a while, but not indefinitely, and certainly they’d run into some problems,” she said.

Investors, meanwhile, seem satisfied with Cherokee’s progress to date. Cherokee’s junk bonds, which were originally sold at a discount price ($850 for every $1,000 in face value) are still quoted at about that price, according to the investment firm Drake Capital Securities in Santa Monica.

The question of whether Cherokee can keep posting double-digit sales gains each year is not an idle one, given the apparel business. Fickle fashion tastes, swings in consumer spending and fierce competition can quickly alter a clothing maker’s fortunes.

At the moment, the outlook for apparel sales is mixed. Barry Strauss, a Los Angeles “selling agent” who sells small apparel makers’ lines to stores, said apparel sales generally are sluggish and that is prompting retailers to cut prices to maintain clothing sales and to seek lower prices from apparel makers.

The stores’ lower prices “to sell the goods, to turn the inventory, isn’t leaving a good profit for either the retailer or the manufacturer,” Strauss said.

But Edward F. Johnson, who heads Johnson Redbook Services, a New York investment firm that specializes in the apparel trade, said he sees clothing orders rebounding in the next two quarters as inventories are trimmed and “because the consumer is still buying.”

In any case, Cherokee, whose advertising posters are commonplace at Los Angeles bus stops, has established a track record of consistent sales and profit growth. Founded as a shoemaker in 1973 by James P. Argyropoulos, the son of a Greek cobbler, Cherokee grew rapidly after Argyropoulos expanded into clothing in 1981 and hired Robert Margolis, a veteran apparel executive, to run the new division.

Cherokee’s sales climbed from $34 million in 1980 to $169 million in its fiscal year ended last May 27, and its profits rose in turn. At the same time, apparel supplanted shoes as Cherokee’s focus, and today shoes account for only 8% of its business.

In 1988, Margolis, Cooper and some other Cherokee executives joined with Deutschman Clayton & Co., a Los Angeles investment firm, in a takeover bid for Cherokee. They were opposed by Argyropoulos, but after he failed to block the deal in court, he resigned as chairman, Margolis became chief executive and the takeover was completed last May.

When Cooper’s group structured the takeover, Cherokee’s earnings before taxes and interest were about $20 million, and the group estimated the company should be able to improve that figure by about 15% a year. And Cherokee estimated it would have to pay about $15 million to $16 million a year in cash to keep up with its debt payments.

As it turned out, for the year ended Dec. 2, Cherokee’s pretax operating income easily exceeded the group’s forecast, reaching about $30 million, or about twice what Cherokee needed to meet the year’s debt costs, Cooper said.

Cherokee’s $56-million bank debt is due to be repaid within three years, and Cooper predicted the company would make substantial reductions in the debt by then and expects to refinance the balance.

But it is impossible to tell in advance if a company can manage lots of debt when it hits a sales slowdown, which is commonplace in the boom-and-bust apparel trade, said Richard Mercier, who tracks Cherokee for Moody’s Investors Service in New York.

“A company in the apparel trade is going to face that cyclicality eventually,” he said. “When it’s an LBO situation, you’ve just got more of a question because of the debt load.”