Cherokee Makes the Most of Its Trademark
Cherokee Inc., now closely tied with the Target chain, found success when it stopped making clothes and started licensing its brand name instead.
The company, which licenses the Cherokee and Sideout brands to other manufacturers and retailers, was recently sought out by MGM Entertainment for advice on how to launch its own licensing enterprise.
The company has come back from two Chapter 11 bankruptcies this decade to post net earnings of $2.2 million for the second quarter that ended July 31, up 67% from the same quarter last year. And now with its brand firmly entrenched and growing in the United States, Cherokee is focused on acquiring other brands and building its licensing domain abroad.
Share prices, however, are mired around $8 and have lost about 12% in value during the past year. The stock closed Monday at $8.13.
“These are tough stocks to get people excited about,” noted analyst Jeff Garrison of Stonefield Josephson. “But Cherokee is exploiting the label as they should. All you have to do is look at what Starbucks has done.
“As a branded label, now you have Starbucks ice cream. The coffee you’re served on a plane is Starbucks. There is a lot of expansion. That is what Cherokee is trying to do, and for that reason, it should be a good investment.”
“We really believe the way Cherokee has gone,” he added, “is the way of the future, especially for smaller-sized manufacturers.”
Robert Margolis, the company’s chairman and chief executive officer, said the stock is undervalued. This summer, the company’s board of directors authorized a repurchase of as many as 1 million shares, or about 11.5% of its outstanding stock, as that stock becomes available.
“We want to see what a buyback does under the right conditions,” Margolis said. The company began as a shoe manufacturer in 1973, then expanded its line to clothing for women and juniors.
In 1989, the company’s underwent a leveraged buyout--incurring huge debt that eventually forced the company to seek bankruptcy protection in 1993.
“Even with a 10% to 12% net income, roughly $22 [million] to $25 million per year, we still couldn’t service our debt,” said Carol Gratzke, Cherokee’s chief financial officer.
At the time the country was in a recession and the apparel industry was undergoing a revolution.
“Retailers were becoming manufacturers,” said Howard Siegel, Cherokee’s president of operations. “The whole value equation in retail was changing. The competition to get the right goods at the right price was much tougher.”
With the rise of stores such as Target, Wal-Mart and Kmart, consumers could get better prices on products than they could find in traditional department stores.
“Cherokee went through a second Chapter 11 in 1994 and the company was on the verge of a Chapter 7 when the board asked Bobby [Margolis] to come back,” said Gratzke.
Margolis, who had been with the company since 1981 and helped expand it from shoes into clothing, had left in 1993 to start his own company. When he returned as chairman and chief executive in 1995, the first thing he did was commission a consumer survey to see where the Cherokee brand stood.
That survey surprised Cherokee management: consumers placed Cherokee in the top 10 of apparel sportswear brand names. The decision was made to stop manufacturing--and to start selling the name.
“They capitalized on the best thing they had going for them, their name,” said Richard Giss, an analyst for Deloitte & Touche LLP. “Even though the company was saddled with their financial problems, it had not impacted their product or market.”
Cherokee stopped its manufacturing operations and Margolis struck a deal with Target in August 1995 to license the Cherokee name, a move that ultimately would turn around the company’s fortunes.
“The world had changed in retail, and this way, the consumer was getting more value at a cheaper price,” Margolis said.
And Cherokee, without the risk and responsibility of being a manufacturer, collected royalties on every item sold with the Cherokee name. Analysts say that licensing deals generally offer a 6% to 12% return on sales, as opposed to the 30% to 40% gross profits for manufacturers.
“The timing was fortunate for them because retailers at the same time were being pressured to be competitive from a price perspective,” Giss said. “There was a long time when price was the only thing. What started happening was that people began to attach an importance to the value of labels.”
Since Cherokee offers a direct license agreement, Target is free to determine the style and manufacturer of whatever they put the Cherokee name on--within certain quality guidelines.
“That’s the beauty of our program,” Gratzke said. “We believe they are smarter than we are. They know who their customers are, what they want and when they want it. We give them autonomy.”
And the Cherokee brand has grown exponentially ever since, extending far beyond women’s apparel and shoes into men’s and children’s apparel, jewelry, watches, decorative housewares, accessories and luggage.
Target launched the brand in August 1996, and within the first six months Cherokee merchandise outsold what Target had projected over an 18-month period--plus an extra $50 million. Last year, more than $1 billion in Cherokee-brand items was sold in Target stores nationwide.
“The Cherokee brand continues to surprise us by the overwhelming success it’s had as a label,” said Anne Cashill, Target trend manager of ready-to-wear. “Prior to having the label, we were doing merchandising by classification.” Shoppers would have to wade through areas of pants, then blouses, then sweaters and so on.
“Now we define our different shopping areas by lifestyle,” Cashill said, “and Cherokee is the largest brand we’re presenting.”
Cherokee’s participation in what Target sells is limited to involvement in how the brand or trademark is used and in helping to extend the brand to other product lines.
“The dream was always to go beyond clothing with the brand,” said Cherokee’s Siegel, himself a veteran retailer. “But the expansion has to have some synergy to it.”
In addition to Target, the company has licensed the name to Midwest retailer Pamida and the Brylane catalog company--but Cherokee is highly aware of not overwhelming each market with the name.
“We have retailers who are building the brand very successfully,” said Cherokee’s Siegel. “But we don’t want to create a situation where people are going head-to-head with each other on the same brand.”
The company has also set up license agreements in Japan, China, the Philippines, Canada and Mexico. They are now targeting Europe.
Cherokee is also growing its business by buying other brands. In 1997, the company bought Sideout, a Southern California-based sportswear clothing company (specifically volleyball, handball and racquetball) founded in 1983 by Steve Ascher.
“We were looking at different ways to grow Sideout in a very difficult environment,” Ascher said. “We approached Bobby [Margolis] and very quickly came to the decision that we were going to sell the name to Cherokee.”
Currently the Sideout brand is sold in 600 stores (including Mervyn’s) nationwide and has evolved into a 12-month sportswear brand.
“The Sideout name is growing way faster than I could have done using a traditional manufacturer model,” Ascher said. “And now that the brand has been extended to year-round sportswear, I believe it’s been insured to be very successful for years to come.”
It’s this kind of accomplishment that helped Cherokee recently secure a consulting agreement with MGM Entertainment as the film and TV company investigates merchandising opportunities.
“The MGM lion is one of the biggest logos in the world,” Margolis said. “It’s highly identifiable and it’s clean. It has no previous license agreements on merchandise.
“A lot of companies, like Disney, for example, have a million licensees. But there are no material conflicts in putting together a license contract for MGM. And we’re well networked to the major retailers. So we’re putting together a bunch of ideas about potential licensees.”
And the search is on to buy other brands.
“I believe so many brands are currently underutilized,” Margolis said. “There’s an oligopoly occurring in this industry and in order to be more competitive and provide people the value they’ve come to expect for the price, then you have to be more vertical in your approach. It’s hard to compete otherwise on a broad base as a traditional manufacturer anymore.”
