Investor Presentation 11 th Annual ICR XCHANGE Conference January 14-15, 2009

Transcription

1 Investor Presentation 11 th Annual ICR XCHANGE Conference January 14-15,

2 2 Safe Harbor Disclosure Certain material in this presentation, as well as press releases s and other written or oral statements we may contain forward-looking statements for the purposes of the safe harbor provided by the Private Securities Litigation Reform Act of When used, the words "anticipates," "believes," "expects," "may," "should" and similar r expressions are intended to identify such forward-looking statements. Forward-looking statements involve known and unknown risk and uncertainties that may cause the actual results,, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties, include, but are not limited to, the t effect of national and regional economic conditions, the financial condition of the apparel arel industry and the retail industry, the overall level of consumer spending, the effect of intense competition in the industry in which the Company operates, adverse changes in licensee or consumer acceptance of products bearing the Company's brands as a result of fashion trends or otherwise, the ability and/or commitment of the Company's licensees ees to design, manufacture and market Cherokee and Sideout branded products, the e Company's dependence on a single licensee for most of the Company's revenues, es, the Company's dependence on its key management personnel, and adverse determinations of claims, liabilities or litigations and the effect of a breach or termination tion by the Company of the management agreement with the Company's CEO. A further list and description of these risk, uncertainties and other matters can be found in the Company's Annual Report on Form 10-K K for Fiscal year 2008, and in its periodic reports on Forms 10-Q Q and 8-K 8 K (if any). Undue reliance should not be placed on the forward-looking statements contained herein because some or all of them may turn out to be wrong. The Company disclaims ims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events and developments.

3 3 Company Overview CHEROKEE is an innovator in global consumer brand management and pioneer of the Retail Direct Licensing concept: Markets, licenses and manages brands in multiple consumer product categories (i.e. apparel, home and entertainment) Unique business model with no inventory or manufacturing risks Consistently profitable with increasing free cash flow and no debt Lean corporate structure only 20 employees with significant profit margins CHEROKEE owned Brands retail sales exceed $2.5 Billion Strong relationships with top global retailers Several new international licensing agreements will produce royalties in CY08

4 4 Cherokee s s Operations Cherokee has a highly leverageable low-cost infrastructure Owned Brands/Lateralization Team: Cover prospective and existing licensees business and focus on growing brand categories and volume under existing contracts (Target, Tesco, Zellers, TJX, Comercial Mexicana, etc.) for owned brands (Cherokee, Sideout, Carole Little) Brand/Retailer Representation Team: Procure new brands to acquire and/or represent and market to retailers Represent retailers for brand procurement Facilitate license agreements for the parties Finance/Compliance and Administration Team Result: 20 employees generating significant free cash flow

5 Experienced Management Team Bobby Margolis, Chairman and Chief Executive Officer Chairman & CEO since May 5, Co-founder of our Apparel Division in Largest shareholder; owns about 12% of CHKE s s outstanding common stock Howard Siegel, President Federated Department stores, Carter Hawley Hale Broadway stores Russell J. Riopelle, Chief Financial Officer RSM EquiCo, Dorchester Capital Advisors, Banc of America Securities, ies, Libra Investments Mark Nawrocki, Senior Vice President Marketing Mervyns (3 years), Target Corp. (6 years) Larry Sass, Senior Vice President Brand Development Guess Inc. 5

6 6 Portfolio of Brands Owned Brands Represented Brands

7 7 Premier Partners exclusively through

8 8 Retail Direct Licensing Summary Cherokee Inc. licenses brands directly to retailers subject to quality and image controls Combines the best of traditional consumer brands with private label Partner with retailer to maximize brand / retailer connection with consumer source of product differentiation (exclusivity) Retailers leverage their economies of scale to source products and a reduce pricing by eliminating conventional wholesale margins Results in a win-win win-win outcome for all our constituents Consumers Retailers Cherokee well known quality brands at moderate prices higher gross margins and profitability increased profitability, reduced business risk The retail direct concept is still in its early stages and growing globally

9 9 Retail Direct Licensing Model Benefits Key Conclusions Provides retailers with greater initial and weighted average gross margins than either conventional brands or private label Retailers incur less price and quantity markdowns, because branded goods can be priced below conventional brands Provides its retail partners with their own exclusive global brand at significantly less cost than conventional brands Allows retail partners to control, expand and customize the brand d for their specific customers in each of their exclusive territories

10 10 GLOBALLY RECOGNIZED CASUAL LIFESTYLE BRAND WITH OVER 35 YEARS OF BRAND EQUITY

11 Cherokee Ranked #9 Worldwide Sales License Magazine April

12 12 WORLD BRANDING STATUS $86.8 BILLION $71.1 BILLION $11.6 BILLION $3.7 BILLION $2.5 BILLION $1.2 BILLION $4.5 BILLION $5.2 BILLION $8.1 BILLION $5.8 BILLION

13 World Branding Status Partner Annual Revenue Current Footprint Future Developments $63.4B United States $86.8B U.K., Scotland, Ireland, Poland, Czech Republic, Slovakia & Hungary China, Thailand, South Korea, Malaysia & Turkey NA Canada $5.8B South Africa $3.7B Mexico $5.2B Chile, Peru Argentina, Colombia $1.2B Saudi Arabia UAE, Qatar, Bahrain, Kuwait, Oman $8.1B Brazil Royalties began in CY08 $4.5B India Royalties began in CY08 $11.6B Spain Future licensing opportunities include Germany, France, Russia and a others 13 Royalties to start in CY09

14 14 is Geographically Diversified Country United States Canada Mexico United Kingdom Central Europe Rest of World Total Brazil, India FY 08 Revenue % of Total Licensees $20.0m 48.1% Target, TJX, Mervyns $2.9m 7.0% Zellers $0.9m 2.2% Comercial Mexicana $13.6m 33.6% Tesco $3.1m 7.6% Tesco $0.6m 1.5% Others $41.6m 100% In FY09 TBD Pao de Acucar, Arvind International Royalties were 52% of FY08 revenues Cherokee is one of the fastest growing brands internationally -- licensed in 30 countries and sold in over 4,000 locations worldwide

15 15 Cherokee is a true Umbrella Brand Retail Sales of Cherokee branded products are Diversified across Major Product Categories For example, of the $2.2 to $2.5 billion in annual retail sales during last 5 years at Target (U.S.), Tesco UK and Zellers (Canada): Men s s categories ranged from 14% to 21% Women s s categories ranged from 25% to 39% Children s s categories ranged from 28% to 46% Accessories/Other categories ranged from 12% to 16% This Product Category Diversification is significantly different from gender-based brands which are nearly all women s s or men s products

16 16 Cherokee Licensing Partner Established in 1995, amended in 1997 and extended numerous times: In January 2008 the Target License Agreement was extended through January 31, 2012,, with perpetual annual renewal options The Cherokee brand is one of the largest brands at Target: Cherokee brand s s annual retail sales in excess of $1.0 billion during last 7 years Primary and growing emphasis in kid s s categories Historical product categories include men s, women s s and kid s s apparel, and certain accessories

17 17 Cherokee Brand Licensing Partner Cherokee contract signed in 2001, agreement continues through January 31, 2011,, with 3-year 3 renewal options available Tesco is the top retailer in the United Kingdom & Ireland, and one o of the top retailers in Central Europe, with multiple store formats Cherokee products successfully launched in Fall 2002 in Men s, Women s, Boy s & Girl s s apparel in casual denim & sportswear, fashion accessories and footwear categories Retail sales in FYE 2/2/08 increased to $933 million from $778 million m in FYE 2/3/07 and $568 million in FYE 1/28/06 In March 2006 expanded Cherokee to Czech Republic, Poland, and Slovakia, S and to Hungary in August 2006; expected to expand Cherokee to China, South Korea, Malaysia, Thailand and Turkey in next months

18 18 Growth Opportunity Tesco s domestic territories represent about 30 million sq ft of selling space of which Cherokee products are sold in about 13.5 million sq ft of selling space (approx stores in UK; 70 in Ireland) Tesco s Growth territories added to the Tesco License Agreement include many larger store formats and represent an estimated 23 million sq ft of additional selling space (> 1.5x area of UK and Ireland) Royalty revenues in Slovakia, Czech Republic and Poland began in March 06; Hungary began in August 06; Asian countries expected to begin over next 12 to 24 months Tesco is projecting store growth in nearly all of these countries (Tesco 2007 Annual Report) Tesco Licensing Agreement Includes: Tesco s Domestic Territories Total # of Stores Sales Area in Million Sq Ft Avg Sales Area Per Store (sq ft) United Kingdom (350) Ireland (70) 1, ,984 24,211 Tesco s s International Growth Territories (Fiscal 07 09) 09) Hungary (72 stores) Slovakia (42 stores) Czech Republic (54 stores) Poland (117 stores) China Malaysia South Korea Thailand Turkey 2, , ,525 52,083 48,810 23,214 89, ,000 56,044 20,270 36,667

19 United States (Target) 19

20 20 Canada (Zellers)

21 Mexico (Comercial) 21

22 United Kingdom (Tesco) 22

23 Central Europe (Tesco) 23

24 Brazil (Pao de Acucar) 24

25 25 Israel (Shufersal)

26 26 Chile (Falabella)

27 27 Brand Representation Business In the past we have executed brand representation licensing agreements ements for HouseBeautiful and Latina magazines Represented Mossimo with Target -- Cherokee received a fixed % of all Mossimo revenues from Target (approximately $2.5 million per year) Sold the Mossimo Finders Agreement for $33.0 million, which was received on October 31, 2006 (in 4th quarter of FYE 2007) Wal-Mart recently launched the Norma Kamali brand clothing at a significant ificant # of their stores and also offered through their website Currently representing several select brands and marketing them to potential licensees in the U.S. and certain international territories

28 Growth Opportunities Concept of Retail Direct Licensing in early stages worldwide Opportunities exist in Apparel, Home Furnishings, Electronics, Health H and Beauty, and Food & Drug World branding our Cherokee Brand with premier partners globally (most recently agreement was with Eroski for Spain, to begin in CY2009) Continue to grow with current licensees organic store growth and territory expansion (Tesco, Falabella, Al Hokair, etc.) Continued financial discipline & expense management Expand product categories with current licensees through ancillary lines, brand extensions, & complementary products Expand international business for owned brands China, Brazil, India, Israel, Germany, Spain, France, Russia, etc. Sign new license agreements in the U.S. and internationally for brands we represent (most recently at Wal-Mart) Selective brand acquisitions 2 acquisitions in last 8 years (Sideout in 1997, Carole Little in 2002) Made proposal to acquire Mossimo Inc. for $8.50 per share in April 2006, which resulted in Cherokee entering into an agreement to sell Mossimo royalties for r $33.0 million (received in Q4 FY07) 28

29 29 Financial Highlights Significant Geographic Diversity to Revenue Streams Int l l revenues now comprise about 52% of ongoing royalty stream Strong balance sheet excess cash, no debt and ROE of 70% Significant operating leverage about $0.70 of every $1 of incremental royalty to operating income EBITDA margins of approximately 70% Business model requires nominal capital investment providing for a dividend payout ratio equal to or greater than 100% Business model generates large amounts of free cash flow Over $112 million paid in dividends and distributions since December 2003 About $12.50 per share paid out in dividends during last 5 years.

30 30 Royalty Revenue Growth $80 Annual and YTD Results $76.6* $ Millions Other TJX Tesco Mossimo Mervyn's Zellers Target $70 $60 $50 $40 $30 $20 $10 $0 $24.7 $28.3$ % CAGR ( ) $33.1 $36.3$38.9 $42.7 $41.6 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 $30.1 $ mo FY09 9 mo FY08 * Includes one-time revenues of approximately $33 million in connection with the sale of the Mossimo Finders Agreement

31 31 Diluted Earnings Per Share Annual and YTD Results $4.00 $3.93* $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.94 $ % CAGR ( ) $1.97 $2.07 $1.68 $1.46 $1.54 $1.84 $1.52 $1.34 $0.50 $0.00 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY mo FY09 9 mo FY08 * Includes one-time revenues of approximately $33 million in connection with the sale of the Mossimo Finders Agreement

32 Returning Excess Cash to Shareholders Since December 2003, Cherokee has paid numerous quarterly and one special dividend, totaling over $112 million Date Type Qtly Dividend Payment Dec 03; March 04 May 04 2 Quarterly $0.375 Special $0.50 June 04; ; Sept 04 2 Quarterly $0.42 Dec 04; ; Mar 05; June 05 3 Quarterly $0.50 Sept 05 Dec 05; Mar 06; June 06 Sept 06 Dec 06; March 07; June 07; Sept 07; Dec 07; March 08; June 08 Sept 08; Dec 08 1 Quarterly 3 Quarterly 1 Quarterly $0.55 $0.60 $ Quarterly $ Quarterly $0.50 * Dividends are paid at the discretion of Cherokee s Board of Directors, and are dependent upon a number of factors such as market conditions, expected future cash flow, and the like. There can be no assurances that future dividends will be equal to or greater than past dividend payments. 32

33 33 Investment Summary Premier retail direct licensing company with a focused & experienced team Proven business model with significant scalability and operating leverage No inventory or manufacturing risk; minimal capital expenditures Global network of relationships with top retailers Consistent financial performance over past decade Strong cash flow generation -> > attractive dividend yield Company is debt-free and has excess cash on balance sheet Free cash flow consistently returned to shareholders Cherokee brand is a true Umbrella Brand : : Men s, Women s s & Kid s Diversified Revenues from large International and Domestic Licensees