Cherokee Chases Licensing Lure - TheStreet

Since emerging from its second swing through bankruptcy court about a year ago,

Cherokee Inc.

(CHKE:Nasdaq), the once-powerful apparel maker, has shed its manufacturing skin and has emerged as a lean, mean licensing machine.

Assuming all goes as planned, by the end of fiscal 1997, on May 31, Cherokee will have $8 million in cash, no debt and very little overhead, according to CFO Carol Gratzke. That figure is contingent on some additional corporate moves, including the sale of a building.

Granted, that's only a fraction of what the company was worth in the early '90s, when annual revenue soared past $200 million, the staff numbered 500, and several manufacturing plants hummed with activity. Today, with just 14 employees and annual overhead under $2 million a year, the company has given up its manufacturing business. It simply sells its name directly to retailers, who use their own manufacturers to make the product.

The company is thinly traded, with only a $39 million market capitalization. Yet, the stock has appreciated 71% since the beginning of the year, when much of the reorganization began. It closed Monday at $5.75.

"Things are happening more quickly than we anticipated," Gratzke says. The company already has hooked 28 licensees since its reincarnation, and Gratzke says Cherokee is working on deals in Asia, the Far East and South America. It also signed a contract for a line of bedding, bath and linens that will be on the market in spring '97.

A deal signed with

Target Stores

in 1995 pits Cherokee against private labels, like the

Arizona

brand, sold by

J.C. Penney

(JCP:NYSE), rather than running it up against big-time national players like

Levi's

and

Esprit

.

And if Cherokee can make inroads into the mammoth discount retail niche, it's looking at a market of $290 billion in annual sales. Kurt Barnard, president of the

Barnard Retail Marketing

newsletter, says a presence in Target opens the door to

Kmart

(KM:NYSE) and

Wal-Mart

(WMT:NYSE). "If you've got those three, you don't need anybody else."

Now that Cherokee, a casualty of the leveraged buyout era, is finally free of debt and cash rich, some might consider the company a takeover target. But Richard Giss, a partner in the retail services group at the accounting firm

Deloitte & Touche

, sees that prospect as unlikely. "They've only got one asset--their name," says Giss.

Gratzke says the company will use its excess cash either to repurchase stock, distribute dividends or purchase another brand name.

Giss thinks Cherokee's biggest challenge will be preserving the reputation of its brand name, as an increasing number of outside companies manufacture products with the Cherokee imprimatur.

"Their full time business is watching what others do with their name," Giss says. "It doesn't mean they'll do it well, but it's not a bad strategy."

By Suzanne Kapner