Cherokee Inc. (NASDAQ:CHKE) Q1 2020 Earnings Conference Call - Final Transcript

Jun 18, 2019 • 04:30 pm ET


Cherokee Inc. (NASDAQ:CHKE) Q1 2020 Earnings Conference Call - Final Transcript


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Henry Stupp

than ever before. I am optimistic about our future and look forward to continuing to sharing our progress.

Before discussing our brands further, I'd like to hand the call over to Steve Brink, our CFO, to review the first quarter 2020 results and updated financial guidance. Steve?

Steven Brink

Thanks, Henry. And good afternoon, everyone.

Revenues for our first quarter were $5.1 million compared to $5.4 million in the prior year's first quarter. This 6% decrease is primarily due to the expiration of the Cherokee brand license in South Africa as well as our divestiture of our Flip Flop Shops franchise business in June 2018. In Q1 last year, we had approximately $800,000 of revenue overall from non-renewed licenses and the Flip Flop Shops business that we sold. Excluding these items, our organic revenue growth was 9% for the quarter.

As Henry noted, first quarter product sales with our licensees in Europe were hampered by the economic uncertainty surrounding Brexit. We think this trend may continue in the future quarters. People are also concerned about the impact of potential higher tariffs on apparel and footwear if the United States enact the announced 25% tariff on goods produced in China, commonly known as Tranche IV. We believe our licensees are being proactive to reduce their exposure to higher tariffs by moving production to countries that aren't exposed to these tariffs and by negotiating lower costs with existing suppliers. However, it's possible that if these tariffs are enacted, prices may increase in our branded products being sold in United States. In turn, this could result in lower retail sales and lower royalty revenue to us.

Now, back to our results for the quarter. The overall decline in royalty revenue in the first quarter was partially offset by revenue from our new design services agreement in China. This agreement continues to demonstrate the value of our product development capabilities. Also, on a positive note, we continue to see the beneficial effects of our restructuring efforts in our operating expenses this quarter. On a year-over-year basis, our ongoing SG&A expenses were down 12% in the first quarter, while our adjusted EBITDA increased 14%.

Total interest expense for the quarter was $2.2 million compared to $1.7 million in the prior year. This increase is primarily due to our increased debt level, along with higher non-cash interest charges related to our new term loan. Again, this is not all cash interest. Our interest expense includes $1.6 million of cash interest, plus $600,000 of non-cash charges for the amortization of deferred financing costs.

Our income tax expense also includes non-cash components. We generated net operating losses in the quarter in both the United States and Europe and we're not recognizing the benefits of these NOLs in our income statement because of previously established valuation allowances. The result is that we have non-cash tax expense reflected in our income statement, which totaled $300,000 for the quarter. Cash taxes were also $300,000 for the quarter.

Our operating profit for the quarter