TMF: There's more to the Cherokee Group
Riopelle: Acquisitions are generally few and far between. We made two over the last eight years or so: the Sideout brand and also the acquisition of the Carole Little and related brands in December 2002. We do see a lot of potential acquisitions, and we get a lot of deal flow toward us, but generally speaking, we're not that active on the acquisition front. It takes a pretty compelling story for us to be interested.
TMF: Is representing brands for other companies the big push for your company?
Riopelle: I would say that's probably the bigger push, because with acquisitions we're not going to be able to pay a whole lot. We have a lot of cash, but we're just not interested in levering up the company to make a large acquisition or do something like that. So we're focusing more on the brand representation business. We're working right now with a number of different brands that we think have a pretty compelling story to tell, to be marketed to retailers in the U.S. and abroad.
TMF: You helped Mossimo
Riopelle: Yeah. It's the relationship with the retailers. We have the right relationships with the right retailers, so we can get the right meeting. Also, the retailers respect the ideas that we bring to them. We're not just throwing something against the wall and hoping it sticks. We get calls every day from brands that want us to represent them, and we probably turn down 95% of them. We don't have a large staff; we have a small, focused staff. We'll take the brands that we think really have a compelling idea that a retailer is going to like and develop those ideas, and then set up the meetings. The key is meeting with the right people at the retailers -- the key decision makers. We have those relationships, and we hope to continue to have those relationships. That's the difference. A lot of guys think they can do this, but you can spend a year meeting with the wrong people at a retailer and go nowhere.
TMF: In the Mossimo deal, Cherokee gets 15% of Mossimo's Target royalties. Is 15% standard?
Riopelle: No. Actually, it was going to be a higher rate, and then we cut it at the end to get the deal done. For the most part, in our brand representation business, it's typically a third.
TMF: You said you turn down 95% of the brands seeking your services. What are the 5% that get you interested? What is the perfect kind of brand you're looking to represent?
Riopelle: It kind of goes on one of two paths. Either it's a legacy brand that we think still has a very strong resonance with the consumer and that the retailer will be able to reposition and have as an exclusive for their own stores, that will be a compelling idea for them. Or it'll be something new, hip, hitting on an unexpected trend in retail that's going to change the landscape over the next few years. Right now, we're representing a couple of different brands in those areas that we're pretty excited about. We're hopeful that we'll be able to get something done soon.
TMF: Over the long run, do you see more of your revenue shifting toward brand representation from royalties on Cherokee-branded sales?
Riopelle: Yeah, exactly. I think that'll be a significant part of our new business going forward. Although we still have a number of territories that the Cherokee brand isn't licensed to. I mentioned China. There are areas in Europe. For example Germany -- we don't have a licensing contract with the Cherokee brand. We don't have anything in India. We don't have anything in parts of South America. We do have a licensing contract in Mexico. So there's plenty of areas to continue to expand the Cherokee brand to, in addition to representing other brands, both domestically and internationally.
TMF: Is it possible down the line that the Cherokee brand would ever be sold or at least the rights in exclusive areas would be sold?
Riopelle: It's possible. We never say never. We've been approached in the past -- various ideas along those lines. We're always willing to listen. For the right price, we would be sellers. But we're not going to sell our shareholders short.
TMF: Several years ago, Cherokee arranged a unique deal where the company issued zero-coupon bonds backed by the Target royalty revenues and passed the proceeds (about $48 million) along to shareholders. The bonds have now been fully repaid. Is it possible we'll see a deal like that in the future, where you are securitizing royalty revenue?
Riopelle: It's possible but probably not likely. The uniqueness that allowed that transaction to occur was we renegotiated the Target contract at that point in time, and they agreed to guarantee six years with minimum annual revenues. So then we securitized that six-year revenue stream, which resulted in $48 million or so of proceeds, which we distributed to shareholders, and the shareholders received, for the most part, capital gains treatment on that distribution. So it was basically a tax-advantaged transaction that worked out well for our shareholders. None of our current licensees would be willing to guarantee something for six years right now at approximately 9 to 10 million a year, so we probably won't have that situation available to us again. But if we were able to negotiate something like that, it's possible we'd do something similar to that again to get the benefits of some leverage without really risking the company at all.
TMF: Why did Target initially agree to such a six-year contract several years ago, whereas now the contracts last for only a year?
Riopelle: Target has the ongoing exclusive for the Cherokee brand, and we really don't have any other brands in our stable right now that are as compelling as Cherokee or that could do 2 billion at retail for somebody. So we're not going to be able to get guaranteed minimums that high for a multi-year timeframe. To try and get Target to do something for another six years, we'd probably have to give up something. We're at that point in our relationship where we're pretty happy with where we are. Obviously, we'd like to turn around a little bit of the decline from Target and get it growing again, but that'll happen over time. So the dynamics aren't in place right now to get all the pieces in place to allow a transaction like that to occur again.
TMF: Let's talk about the dividends you have paid recently. Since last November, you've paid out three quarterly dividends and a special dividend, with the proceeds from the settlement with Mossimo. Can investors expect a regular dividend?
Riopelle: We recently paid our third consecutive quarterly dividend. We don't make forward-looking statements about future dividends. However, given that we're focused on increasing shareholder value and we heard from various shareholders that they think the payment of dividends is a good one for increased shareholder value, it's entirely possible that if financial conditions continue to permit it, we'll continue to pay a dividend if the conditions warrant it and in the absence of any other compelling opportunities or uses of capital with that cash. That's the long way of saying we don't make forward-looking statements, but we have paid a dividend in the past. It may not necessarily be unreasonable to expect it to continue.
TMF: Possible future dividends would obviously use up some of your cash flow, but given that you have little in the way of capital expenditure requirements, are you going to continue share repurchases?
Riopelle: We do have share repurchases open to us. We haven't made any for the past year and a half or so, but that's one of the options that's always available to us in the future. We'll continue to monitor the situation. It really depends upon what our board decides is in the best interest of shareholders and to continue to create shareholder value.
TMF: One of the big concerns investors have with Cherokee is the compensation of the CEO, Bob Margolis. He was paid around $3.8 million last year, and if he's terminated, he'll get about $11.4 million. To put that in perspective, the median salary of a CEO at the 500 largest companies in America is about $4.1 million a year, and they have sales of around $8 billion -- well over 200 times greater than Cherokee's sales. How does the company justify the salary of Margolis?
Riopelle: That contract was put into place several years ago. If you look at the growth of our stock price over the past six or seven years, I would ask you to compare it to just about anybody on the street, and I think you'll see that our returns have been much more compelling than anyone else. [Cherokee's stock is up over 350% since it's low of 1997, and that excludes all dividends.] Bobby Margolis has performed for us. He's performed for the shareholders. The contract was put in place. It was put to a shareholder vote, and it was voted in. It is what it is.
TMF: Let's change directions. Is there anything keeping you up at night?
Riopelle: Our focus is just continuing to put on new licensing contract revenue, continuing to grow revenue responsibly and carefully, and really finding good retailing partners to do that with. That's the key to our business. There's no inherent risk right now that keeps us up at night. If one of our big retailing partners was to suffer a real serious downturn, that would, I suppose, give us cause for concern. But I think we wouldn't be the only ones in that boat. Fortunately, that's not the case. Most of our retail partners are doing quite well. Fortunately, everything is going pretty well right now. But we continue to manage our costs. We continue to monitor our revenues with our retailing partners and hopefully will be able to put on some more meaningful contracts in the future that will bear fruit down the road.
TMF: Finally, what are the chances that Cameron Diaz comes back as a "Cherokee Girl"?
Riopelle: Gee, I don't know. I will tell you this: Cameron Diaz went to my same high school, so there's another connection there, although unfortunately, I'm a few years older than she is. But if she ever has an interest in coming back and being a "Cherokee Girl," we'd love to talk with her about it.
TMF: Thank you very much, Russell, for talking with us.
Riopelle: Thanks, Matt.
To learn more about Cherokee's direct-retail strategy, read the first part of Matt Logan's interview with CFO Russell Riopelle in License to Make Money .
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