Big-box retailer Target (NYSE: TGT ) hasn't been showing top performance recently, but what if I told you I knew a way of investing in one of its thriving segments?
Target enters strategic relationships with many clothing brands that it retails throughout its stores, but one company in particular has caught my eye. Cherokee (Nasdaq: CHKE ) -- the licensor, marketer, and manager of various trademark names such as Cherokee, Sideout, and Saint Tropez-West -- has certainly had its stock price depressed this year, but at its current valuation and outlook, I think this stock is a great way to purchase a "piece" of Target.
When I first wrote about this company this summer in Contrarian Shopping List, I described its business model like this: "The company is an IP warehouse. It buys up clothing, footwear, and accessory brands -- then lets someone else do the work of making and selling the merchandise. Cherokee's role in the process is almost literally to do nothing but sit back and cash the checks -- oh, and mail out 8.2% dividend checks to its investors, too."
Over the succeeding five months, that dividend has swelled as the stock's share price has ebbed, but based on what I saw in the most recent quarterly earnings news, now might be a good time to buy.
You see, the knock against Cherokee historically has been that its business is too closely tied to Target. When Target's doing great, and knocking the stuffing out of rivals like Wal-Mart (NYSE: WMT ) and Sears Holdings (Nasdaq: SHLD ) , chances are Cherokee will share in the success -- because the branded clothing lines it sells through Target probably participated in that store's sales success. But when Target struggles, as it's done lately, Cherokee must feel the pain.
But that assumption doesn't necessarily still hold true.
Cherokee transformed a mere 1.6% rise in royalty revenue into 11% earnings growth last quarter. Clothing sales through Target dropped 14.2% in Cherokee's third quarter, but higher royalty rates on those sales kept Target-sourced income basically level. Meanwhile, sales at Britain's Tesco chain zoomed 25% year over year, making that chain now the No. 1 revenue-generator for Cherokee (at 42% of revenues). Other retail clients of Cherokee, including TJX (NYSE: TJX ) , combine to make up the remaining 21%.
With its light business model, 9.1% dividend model at current prices, and a major portion of royalty revenues relying on an international retailer, this could make for a Merry Christmas for "retail" investors, despite what the economy does.
Other retail Foolishness:
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