SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

 

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☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended October 31, 2015.

 

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period From            to            .

 

Commission file number 0-18640

 

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CHEROKEE INC.

(Exact name of registrant as specified in its charter)

 

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Registrant’s telephone number, including area code  (818) 908-9868

 

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

 

CHEROKEE INC.

 

INDEX

 

 

 

Part I. Financial Information

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

CHEROKEE INC.

CONSOLIDATED BALANCE SHEETS

Unaudited

(amounts in thousands, except share and per share amounts)

 

 

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

 

CONSOLIDATED STATEMENTS OF INCOME

Unaudited

(amounts in thousands, except per share amounts)

 

 

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(amounts in thousands)

 

 

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(amounts in thousands)

 

 

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(amounts in thousands)

 

 

 

See the accompanying notes which are an integral part of these consolidated financial statements.

CHEROKEE INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except percentages, share and per share amounts)

 

(1)   Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of October 31, 2015 and for the three and nine month periods ended October 31, 2015 and November 1, 2014 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and Article 10 of Regulation S-X. These consolidated financial statements include the accounts of Cherokee Inc. (“Cherokee” or the “Company”) and its consolidated subsidiaries and have not been audited by independent registered public accountants, but include all adjustments, consisting of normal recurring accruals, which in the opinion of management of Cherokee are necessary for a fair statement of the Company’s financial position and the results of operations for the periods presented. All material intercompany accounts and transactions have been eliminated during the consolidation process. The accompanying consolidated balance sheet as of January 31, 2015 has been derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for an audited balance sheet. The results of operations for the three and nine month periods ended October 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2016 or for any other period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

As used herein, the term “Third Quarter” refers to the three months ended October 31, 2015; the term “Nine Months” refers to the nine months ended October 31, 2015; the term “Fiscal 2017” refers to the fiscal year ending January 28, 2017; the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; and the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014.

 

(2)   Summary of Significant Accounting Policies

 

Receivables

 

Receivables are reported at amounts the Company expects to be collected, net of allowance for doubtful accounts.

 

Allowance for Doubtful Accounts

 

The Company records its allowance for doubtful accounts based upon its assessment of various factors, such as: historical experience, age of accounts receivable balances, credit quality of the Company’s licensees, current economic conditions, bankruptcy, and other factors that may affect the Company’s licensees’ ability to pay. There was no allowance for doubtful accounts as of October 31, 2015 or January 31, 2015.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued new guidance relating to revenue from contracts with customers that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the Financial Accounting Standards Board deferred the effective date of this guidance for all entities by one year. As a result, this guidance is effective for fiscal periods beginning after December 15, 2017. The anticipated impact of the adoption of this guidance on the Company is still being evaluated.

 

In August 2014, the Financial Accounting Standards Board issued authoritative guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern and requires additional disclosures if certain

criteria are met. This guidance is effective for fiscal periods ending after December 15, 2016. The adoption of this guidance will not impact the Company’s consolidated financial statements or related disclosures.

 

In February 2015, the Financial Accounting Standards Board issued authoritative guidance which modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal periods beginning after December 15, 2015, and allows for either full retrospective or modified retrospective adoption, with early adoption permitted. The adoption of this guidance is not expected to impact the Company’s consolidated financial statements or related disclosures.

 

Use of Estimates

 

On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition and deferred revenue, allowance for doubtful accounts, valuation of long-lived assets, stock based compensation and income taxes. The Company bases its estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased and money market funds purchased with an original maturity date of three months or less to be cash equivalents. At October 31, 2015 and January 31, 2015, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation (“FDIC”) limits. 

 

Revenue Recognition and Deferred Revenue

 

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the buyer’s price is fixed or determinable and collection is reasonably assured. Revenues from royalty and brand representation agreements are recognized when earned by applying contractual royalty rates to quarterly point of sale data received from the Company’s licensees. The Company’s royalty revenue recognition policy provides for recognition of royalties in the quarter earned.

 

The Company’s agreement with Target Corporation (“Target”) for the Cherokee brand in the U.S. accounts for the majority of the Company’s historical revenues and is structured to provide royalty rate reductions once certain cumulative levels of retail sales are achieved by Target. With respect to Target’s sales in the U.S. of Cherokee branded products other than in the school uniforms category and adult products sold on Target’s website, revenue is recognized by applying the reduced contractual royalty rates prospectively to point of sale data after defined sales thresholds are exceeded. The royalty rate reductions do not apply retroactively to sales since the beginning of the fiscal year. As a result, the Company’s royalty revenues as a percentage of Target’s retail sales in the U.S. are highest at the beginning of each fiscal year and decrease during the fiscal year as Target exceeds sales thresholds as set forth in the Company’s agreement with Target. The amount of Cherokee brand royalty revenue earned by the Company from Target in any quarter is dependent not only on Target’s retail sales of Cherokee branded products in the U.S. in each quarter, but also on the royalty rate then in effect after considering Target’s cumulative level of retail sales for Cherokee branded products in the U.S. for the fiscal year. Historically, with Target, this has caused the Company’s first quarter to be the Company’s highest revenue and most profitable quarter and the Company’s fourth quarter to be the Company’s lowest revenue and least profitable quarter. However, such historical patterns may vary in the future depending upon the terms of any new license agreements, retail sales volumes achieved in each quarter from Target and revenues the Company receives from Target or other licensees that may or may not be subject to reduced royalty rates based upon cumulative sales, including with respect to the Company’s Liz Lange and Completely Me by Liz Lange brands, Cherokee brand in the school uniforms category, Cherokee adult products sold on Target’s website, and the Hawk and Tony Hawk brands.

 

In order to ensure that Cherokee’s licensees are appropriately reporting and calculating royalties owed to Cherokee, all of Cherokee’s license agreements include audit rights to allow Cherokee to validate the amount of the

royalties paid. Any revenue resulting from these audits, or other audits, is recognized in the financial statements of the current reporting period.

 

Franchise revenues includes royalties and franchise fees. Royalties from franchisees are based on a percentage of net sales of the franchisee and are recognized as earned. Initial franchise fees are recorded as deferred revenue when received and are recognized as revenue when a franchised location is opened as all material services and conditions related to the franchise fee have been substantially performed upon the opening. Renewal franchise fees are recognized as revenue when the franchise agreements are signed and the fee is paid since there are no material services and conditions related to the franchise fees.

 

Deferred Financing Costs and Debt Discount

 

Deferred financing costs and debt discounts are capitalized and amortized into interest expense over the life of the debt.

 

Foreign Withholding Taxes

 

Licensing revenue is recognized gross of withholding taxes that are remitted by the Company’s licensees directly to their local tax authorities.

 

Property and Equipment

 

Property and equipment consist of the following:

 

 

Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are written off, and the resulting gains or losses are included in current operations. Depreciation is provided on a straight line basis over the estimated useful life of the related asset.

 

Computers and related equipment and software are depreciated over three years. Furniture and store fixtures are depreciated over the shorter of seven years, or the remaining term of the licensee agreement. Leasehold improvements are depreciated over the shorter of five years, or the remaining life of the lease term.  Depreciation expense was $115 and $322 for the three and nine month periods ended October 31, 2015 and $152 and $361 for the three and nine month periods ended November 1, 2014, respectively.

 

Earnings Per Share Computation (amounts in thousands, including share amounts)

 

The following table provides a reconciliation of the numerator and denominator of the basic and diluted per-share computations for the three and nine month periods ended October 31, 2015 and November 1, 2014:

 

 

The computation for the diluted number of shares excludes unexercised stock options that are anti-dilutive. There were 335 and 198 shares underlying anti-dilutive stock options for the three and nine month periods ended October 31, 2015, respectively, and 502 and 917 shares underlying anti-dilutive stock options for each of the three and nine months periods ended November 1, 2014.

 

Basic earnings per share (“EPS”) is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to the computation for basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

 

Significant Contracts

 

The terms of the Company’s relationship with Target are set forth in a restated license agreement with Target, which was entered into effective as of February 1, 2008 and amended (i) on January 31, 2013 to add the category of school uniforms, (ii) on April 3, 2013 to provide for a fixed royalty rate of 2% for sales of Cherokee branded products in the category of adult merchandise sold on Target’s website (target.com) in Fiscal 2015 and in future periods and (iii) on January 6, 2014 to reflect Target’s election to renew the agreement through January 31, 2017 and to provide that Target can renew the agreement for successive two (2) year periods, provided that it satisfies the minimum guaranteed royalty payment of $10,500 for the preceding fiscal year (the “Restated Target Agreement”). The Restated Target Agreement grants Target the exclusive right in the United States to use the Cherokee trademarks in various specified categories of merchandise. On September 3, 2015, Target orally informed the Company that the Restated Target Agreement would not be renewed and will terminate at the end of its current term, which expires January 31, 2017.  The non-renewal was confirmed in writing on September 4, 2015.  The Restated Target Agreement, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and Fiscal 2017 through its expiration. The Cherokee branded products in the school uniforms category will expire at the end of its current term on January 31, 2018, and Target will continue to pay the minimum guarantee through that period.

 

Under the current terms of the Restated Target Agreement, the minimum annual guaranteed royalty for Target is $10,500 and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum guaranteed royalty of $800).Under the Restated Target Agreement, Target has agreed to pay royalties based on a percentage of Target’s net sales of Cherokee

branded merchandise during each fiscal year, which percentage varies according to the volume of sales of merchandise other than sales of Cherokee branded products in the school uniforms category and, beginning in Fiscal 2015, other than sales of Cherokee branded products in the adult merchandise category that are made on Target’s website. The Company assumed a separate license agreement with Target for the Liz Lange brand in connection with the Company’s acquisition of the applicable assets in September 2012.

 

In connection with the acquisition of the “Hawk” and “Tony Hawk” signature apparel brands and related trademarks in January 2014, , Cherokee and Kohl’s entered into an amended license agreement. Pursuant to the license agreement, Kohl’s is granted the exclusive right to sell Tony Hawk and Hawk branded apparel and related products in the United States for a four-year term and has agreed to pay Cherokee an annual royalty rate for its sales of Hawk branded signature apparel and related products in the United States, subject to a minimum annual guaranteed royalty of $4,800.

 

Stock-Based Compensation

 

Effective July 16, 2013, the Company’s stockholders approved the 2013 Stock Incentive Award Plan (the “2013 Plan”). The 2013 Plan serves as the successor to the 2006 Incentive Award Plan (which includes the 2003 Incentive Award Plan as amended by the adoption of the 2006 Incentive Award Plan) (the “2006 Plan”). The 2013 Plan authorized to be issued (i) 700,000 additional shares of common stock, and (ii) 102,483 shares of common stock previously reserved but unissued under the 2006 Plan. No future grants will be awarded under the 2006 Plan, but outstanding awards previously granted under the 2006 Plan continue to be governed by its terms. Any shares of common stock that are subject to outstanding awards under the 2006 Plan which are forfeited, terminate or expire unexercised and would otherwise have been returned to the share reserve under the 2006 Plan will be available for issuance as common stock under the 2013 Plan. The 2013 Plan provides for the issuance of equity-based awards to officers, other employees, and directors.

 

Stock Options

 

Stock options issued to employees are granted at the market price on the date of grant, generally vest over a three-year period, and generally expire seven to ten years from the date of grant. The Company issues new shares of common stock upon exercise of stock options. The Company has also granted non-plan stock options to certain executives as a material inducement for employment. The Company accounts for stock options under authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.

 

The Company estimates the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the consolidated statements of income. The compensation expense recognized for all stock-based awards is net of estimated forfeitures over the award’s service period.

 

Stock-based compensation expense recognized in selling, general and administrative expenses for stock options for the nine months was $1,607, as compared to $780 for the comparable period in the prior year.

 

A summary of all activity for the Company’s stock options for the Nine Months is as follows:

 

 

As of October 31, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,346, which is expected to be recognized over a weighted average period of approximately 2.29 years. The total fair value of all options which vested during the Nine Months was $677.  

 

Performance Stock Units and Restricted Stock Units

 

In 2013, the Compensation Committee of the Company’s board of directors (the “Board of Directors”) granted certain performance-based equity awards to executives under the 2006 Plan.

 

The performance metric applicable to such awards is compound stock price growth, using the closing price of the Company’s common stock on February 1, 2013, or $13.95, as the benchmark. The target growth rate is 10% annually, which results in an average share price target of (i) $15.35 for Fiscal 2014, (ii) $16.88 for Fiscal 2015 and (iii) $18.57 for Fiscal 2016.  The average share price will be calculated as the average of all market closing prices during the January preceding the applicable fiscal year end. If a target is met at the end of a fiscal year, one third of the shares subject to the award will vest. If the stock price target is not met, the relevant portion of the shares subject to the award will not vest but will roll over to the following fiscal year. The executive must continue to be employed by the Company through the relevant vesting dates to be eligible for vesting. The target average share price was met for Fiscal 2015, which resulted in the vesting of two thirds of the shares subject to each award.

 

Since the vesting of these performance-based equity awards is subject to market based performance conditions, the fair value of these awards was measured on the date of grant using the Monte Carlo simulation model for each vesting tranche. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award grant and calculates the fair market value for the performance units granted. The Monte Carlo simulation model also uses stock price volatility and other variables to estimate the probability of satisfying the performance conditions and the resulting fair value of the award.

 

In June 2015, the Compensation Committee of the Company’s Board of Directors granted RSUs and stock options to each member of the Board of Directors and to each of the Company’s executive officers under the 2013 Plan. All of the equity awards approved at that meeting vest in equal annual installments over three years, such that the full grants shall be vested on the third anniversary of the grant date. The fair value of the RSU awards was measured on the effective date of grant using the price of the Company’s common stock.

 

In August 2014, the Compensation Committee of the Company’s Board of Directors granted a sales-based performance-based equity award to an employee under the 2013 Plan, which vests in five increments dependent upon achievement of certain annual sales targets. The fair value of this award was measured on the effective date of grant using the price of the Company’s common stock.

 

Stock-based compensation expense for restricted stock and performance stock units for the Nine Months was $833 compared to $244 for the comparable period in the prior year.

 

A summary of all activity for the Company’s restricted stock and performance stock units for the Nine Months is as follows:

 

 

As of October 31, 2015, total unrecognized stock-based compensation expense related to restricted stock and performance stock units was approximately $3,516, which is expected to be recognized over a weighted average period of approximately 2.58 years.

 

Intangible Assets

 

The Company holds various trademarks including Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Flip Flop Shops®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others, in connection with numerous categories of apparel and other goods. These trademarks are registered with the United States Patent and Trademark Office and corresponding government agencies in a number of other countries. The Company also holds trademark applications for Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Flip Flop Shops, Sideout, Sideout Sport, Carole Little, Chorus Line, Saint Tropez-West, All That Jazz, and others in numerous countries. The Company intends to renew these registrations, as appropriate, prior to expiration. The Company monitors on an ongoing basis unauthorized uses of the Company’s trademarks, and relies primarily upon a combination of trademark, copyright, know-how, trade secrets, and contractual restrictions to protect the Company’s intellectual property rights both domestically and internationally.

 

Trademark registration and renewal fees are capitalized and are amortized on a straight-line basis over the estimated useful lives of the assets. Trademark acquisitions are capitalized and are either amortized on a straight-line basis over the estimated useful lives of the assets, or are capitalized as indefinite-lived assets, if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to Cherokee. Trademarks are evaluated for the possibility of impairment at least annually.

 

During the Nine Months, the Company has acquired various intangible assets related to the Everyday California lifestyle brand and related trademarks and the Flip Flop Shops brand and related trademarks. The consideration for the Everyday Lifestyle brand and assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal 2017 and the fiscal year ending January 27, 2018. The consideration for the Flip Flop Shops brand and assets consisted of a cash payment of $12,000. See Note 3 of these consolidated financial statements for further information about the acquisition of the Flip Flop Shops brand and related assets.

 

Intangible assets consist of the following:

 

 

Amortization expense of intangible assets was $633 and $699 for the nine month periods ended October 31, 2015 and November 1, 2014, respectively. Expected amortization of intangible assets for fiscal years 2017, 2018, 2019, 2020, and 2021 is approximately $900,  $600,  $300,  $300 and $200, respectively. Certain acquired trademarks are

indefinite lived and not amortized. The weighted average amortization period for other trademarks and franchise agreements was 9.4 and 11 years and 9.4 years as of October 31, 2015 and 9.4 years for trademarks as of January 31, 2015.

Trademark registration and renewal fees capitalized during the Nine Months totaled approximately $67.  Trademark acquisition, registration, and renewal fees capitalized during the nine month periods ended November 1, 2014 totaled $59.

Fair Value of Financial Instruments

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1:  Observable inputs, such as quoted prices for identical assets or liabilities in active markets

 

Level 2:  Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs

 

Level 3:  Unobservable inputs for which there is little or no market data, which require the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities

 

The carrying amount of receivables, accounts payable and accrued liabilities approximates fair value due to the short-term nature of these instruments. Long-term debt approximates fair value due to the variable rate nature of the debt.

 

The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company. Periodically, long-lived assets that will continue to be used by the Company need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses involve management judgment. In the event the projected undiscounted cash flows are less than the net book value of the assets, the carrying value of the assets will be written down to their estimated fair value, in accordance with authoritative guidance. The estimated undiscounted cash flows used for this nonrecurring fair value measurement are considered a Level 3 input, which consist of unobservable inputs that reflect assumptions about how market participants would price the asset or liability. These inputs would be based on the best information available, including the Company’s own data.

 

Income Taxes

 

Income tax expense of $802 was recognized for the Third Quarter, resulting in an effective tax rate of 34.2% in the Third Quarter, as compared to 35.8% in the third quarter of last year and compared to 32.4% for the full year of Fiscal 2015. The effective tax rate for the Third Quarter differs from the statutory rate due to the effect of certain permanent nondeductible expenses, the apportionment of income among state jurisdictions, and the benefit of certain tax credits.

 

The amount of unrecognized tax benefits was approximately $230 and $449, respectively, at October 31, 2015 and January 31, 2015. At October 31, 2015, approximately $152 of unrecognized tax benefits would, if recognized, affect the effective tax rate.

 

In accordance with authoritative guidance, interest and penalties related to unrecognized tax benefits are included within the provision for taxes in the consolidated statements of income. The total amount of interest and penalties recognized in the consolidated statements of income for the Third Quarter was $(36) as compared with $4 in

the third quarter of last year. As of October 31, 2015 and January 31, 2015, respectively, the total amount of accrued interest and penalties included in the liability for unrecognized tax benefits was $51 and $84.

 

The Company has unrecognized tax benefits pertaining to the issue of its taxability in various state tax jurisdictions.  It is reasonably possible that the amount of unrecognized tax benefits may decrease within the next 12 months as a result of the Company’s interaction with these various state tax jurisdictions.  The Company anticipates that the total amount of unrecognized tax benefits may decrease in the next 12 months by approximately $230.

 

The Company files income tax returns in the U.S. federal and California and certain other state jurisdictions. For federal income tax purposes, the year ended February 2, 2013 and later tax years remain open for examination by the tax authorities under the normal three year statute of limitations. For state tax purposes, the year ended January 28, 2012 and later tax years remain open for examination by the tax authorities under a four year statute of limitations.

 

Marketing and Advertising

 

Generally, the Company’s “Direct to Retail” licensees fund their own advertising programs. Cherokee’s marketing, advertising and promotional costs totaled $858 and $876 for the nine month periods ended October 31, 2015 and November 1, 2014, respectively. These costs are expensed as incurred and were accounted for as selling, general and administrative expenses.

 

The Company provides marketing expense money to certain large licensees based upon sales criteria to help them build the Company’s licensed brands in their respective territories, thus providing an identifiable benefit to Cherokee. The amounts paid for such marketing expenses during the nine month periods ended October 31, 2015 and November 1, 2014 were $396 and $168, respectively, and are included in the total marketing, advertising and promotional costs, based upon authoritative guidance.

 

Deferred Rent and Lease Incentives

 

When a lease includes lease incentives (such as a rent abatement) or requires fixed escalations of the minimum lease payments, rental expense is recognized on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and amounts payable under the lease is included in deferred rent and lease incentives in the accompanying consolidated balance sheets. For leasehold allowances, the Company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the consolidated statements of income over the term of the lease.

 

Comprehensive Income

 

Authoritative guidance establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For the three months ended October 31, 2015 and November 1, 2014, the Company has no comprehensive income components and accordingly, net income equals comprehensive income.

 

Treasury Stock

 

Repurchased shares of the Company’s common stock are held as treasury shares until they are reissued or retired. When the Company reissues treasury stock, and the proceeds from the sale exceed the average price that was paid by the Company to acquire the shares, the Company records such excess as an increase in additional paid-in capital.

 

Conversely, if the proceeds from the sale are less than the average price the Company paid to acquire the shares, the Company records such difference as a decrease in additional paid-in capital to the extent of increases previously recorded, with the balance recorded as a decrease in retained earnings.

 

(3)  Business Combinations

FFS Merger

On October 13, 2015, Cherokee entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FFS Holdings, LLC, a Delaware limited liability company (“FFS”), FFS Merger Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of Cherokee (“Merger Sub”), and Darin Kraetsch, solely in his capacity as the representative of the FFS equityholders. Flip Flop Shops is a franchise retail chain dedicated to offering the hottest brands and latest styles of flip flops, casual footwear and accessories.

 

Pursuant to the Merger Agreement, Merger Sub merged with and into FFS, with FFS continuing as the surviving corporation and a wholly owned subsidiary of Cherokee (the “Merger”).

 

Cherokee acquired FFS for the base purchase price of $12,000, consisting of $6,000 in cash and the remaining $6,000 in debt, which is subject to certain adjustments and escrow arrangements. The Merger was treated as a business combination accounted for using the acquisition method of accounting. The Company has incurred legal, accounting, banking and other professional costs relating to the Merger in the amount of approximately $500 and has included these costs in selling, general and administrative expenses in the Third Quarter. Trademarks have been treated as indefinite‑lived and no amortization has been recorded. Trademarks are evaluated for the possibility of impairment at least annually. Franchise agreements have been treated as finite-lived with corresponding amortization expense. Goodwill primarily relates to the excess cash flows to be generated as the Flip Flop Shops franchise grows through the opening of new stores and the generation of new franchisees. The total amount of goodwill that is expected to be deductible for tax purposes is $5,979. The amounts of revenue and earnings of FFS since the completion of the Merger are included in the consolidated statements of income included herein and totaled approximately $80 and ($37) for the 18 day reporting period.

 

The initial accounting for the Merger is preliminary, as the Company consummated the acquisition on October 13, 2015. This is based upon an initial draft of the purchase price allocation provided to us by a professional services firm. We expect to receive the finalized report in early Calendar 2016. As a result, the purchase price allocation may be adjusted in the future to reflect updated information.

 

Preliminary Purchase Price Allocation

 

 

 

Supplemental information on an unaudited pro forma basis, as if the acquisition had been completed as of February 2, 2014, is as follows:

 

 

 

 

 

 

 

 

 

(4)   Debt

 

Credit Agreement with JPMorgan Chase

 

On September 4, 2012, Cherokee and JPMorgan Chase Bank, N.A. (“JPMorgan”) entered into a credit agreement (as amended, the “Credit Agreement”), which was amended on January 31, 2013 in connection with the Company’s acquisition of rights related to the Cherokee brand in the school uniforms category, was further amended on January 10, 2014 in connection with the Company’s acquisition of the Hawk and Tony Hawk brands, and was further amended on October 13, 2015 in connection with the Merger with FFS. Effective October 13, 2015, Cherokee and JPMorgan entered into amendments to each of (i), the “Credit Agreement, (ii) the term note that was originally issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 31, 2013 and January 10, 2014 (as amended, the “2013 Term Note”), (ii)  the term note that was originally issued by Cherokee in favor of JPMorgan as of January 10, 2014 (as amended, the “2014 Term Note”) and (iii) the line of credit note, which was issued by Cherokee in favor of JPMorgan as of September 4, 2012 and previously amended by the parties effective January 10, 2014 (as amended, the “Revolver”).  In addition, pursuant to the Credit Agreement, Cherokee issued to JPMorgan a new term note (the “2015 Term Note” and, together with the foregoing amendments, the “Credit Agreement Amendments”) in exchange for its principal amount of $6,000.  Pursuant to the Credit Agreement Amendments, the maturity dates of each of the 2013 Term Note, the 2014 Term Note and the Revolver were amended to be March 1, 2017.  The principal outstanding under the 2015 Term Note is to be repaid on a quarterly basis, commencing on November 30, 2015 and continuing thereafter through February 28, 2017 in equal principal installments of $300, with any remaining principal balance due on March 1, 2017.  The 2015 Term Note bears interest equal to either: (i) an adjusted annual LIBOR rate reset monthly, bi-monthly or quarterly, plus 2.75% or 3.00% depending on the applicable senior funded debt ratio or (ii) the Bank’s annual prime rate or such annual prime rate plus 0.25% depending on the applicable senior funded debt ratio, with a floor equal to the 1 month LIBOR rate plus 2.5%. Pursuant to the Credit Agreement, the definition of “senior funded debt ratio” requires that Cherokee not exceed a ratio equal to (i) 2.25 to 1.00 until the fiscal quarter ending January 31, 2016, and (ii) 2.00 to 1.00 thereafter. As of October 31, 2015, borrowings under the credit agreement totaled approximately $26,000 in principal amount under three term notes. The company also has a revolving line of credit in principal amount of $2,000 available for future borrowings.

 

The Credit Agreement Amendments also waive the event of default under the Credit Agreement that resulted from the election by Target in September 2015 to not renew the Restated Target Agreement when the current term expires on January 31, 2017. Prior to JPMorgan’s waiver of this event of default in the Credit Agreement Amendments, the Company and JPMorgan had entered into a forbearance agreement, pursuant to which JPMorgan had agreed that it would not exercise any of its rights or remedies under the Credit Agreement solely with respect to this event of default through October 12, 2015, the day immediately preceding the waiver granted in the Credit Agreement Amendments.

 

Following the issuance of the 2015 Term Note, Cherokee’s total borrowings under the Credit Agreement (collectively, the “Loan”) are evidenced by (i) the 2013 Term Note, which was issued in the principal amount of $16,600, of which approximately $7,000 was outstanding as of October 31, 2015, (ii) the Revolver, which provides Cherokee with a revolving line of credit in the principal amount of $2,000, none of which was outstanding as of October 31, 2015, (iii) the 2014 Term Note, which was issued in the principal amount of $19,000 , of which approximately $13,000 was outstanding as of October 31, 2015 and (iv) the 2015 Term Note in the principal amount of $6,000, all of which was outstanding as of October 31, 2015. Cherokee paid an upfront fee equal to $30 in connection with the issuance of the 2015 Term Note.  The upfront fee is recognized as a debt discount.

 

Consistent with the existing terms of the Credit Agreement, the Loan is secured by continuing security agreements, trademark security agreements and continuing guarantees executed by Cherokee and its subsidiaries, as applicable. In addition, the Credit Agreement includes various restrictions and covenants regarding the operation of Cherokee’s business, including covenants that require Cherokee to obtain JPMorgan’s consent in certain circumstances before Cherokee can: (i) incur additional indebtedness, (ii) make acquisitions, mergers or consolidations in excess of $5,000 on an aggregate basis, (iii) issue any equity securities other than pursuant to Cherokee’s employee equity incentive plans or programs or (iv) repurchase or redeem any outstanding shares of common stock or pay dividends or other distributions, other than stock dividends, to Cherokee’s stockholders. The Credit Agreement also imposes financial covenants, including: (i) a minimum “fixed charge coverage ratio” of at least 1.2 to 1.0 and (ii) a limitation of

Cherokee’s “senior funded debt ratio” as described above. Further, Cherokee has granted a security interest in favor of JPMorgan in all of Cherokee’s assets (including trademarks) as collateral for the Loan. As of October 31, 2015, the Company was in compliance with its financial and other covenants under the Credit Agreement. JPMorgan has the right to terminate its obligations under the Credit Agreement, accelerate the payment on any unpaid balance of the Credit Agreement and exercise its other rights, including foreclosing on Cherokee’s assets under the security agreements.

 

(5)   Commitments and Contingencies

 

Trademark Indemnities

 

Cherokee indemnifies certain customers against liability arising from third- party claims of intellectual property rights infringement related to the Company’s trademarks. These indemnities appear in the licensing agreements with the Company’s customers, are not limited in amount or duration and generally survive the expiration of the contracts. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, the Company is unable to determine the range of estimated losses that it could incur related to such indemnifications.

 

Litigation

 

Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the expected probable favorable or unfavorable outcome of each claim. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or existing claims evolve, such revisions in estimates of the potential liability could materially impact the results of operations and financial position. The Company may also be involved in various other claims and other matters incidental to the Company’s business, the resolution of which is not expected to have a material adverse effect on the Company’s financial position or results of operations. No material amounts were accrued as of October 31, 2015 or January 31, 2015 related to any of the Company’s legal proceedings.

 

(6)   Segment Reporting

 

Authoritative guidance requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies reportable segments based on how management internally evaluates separate financial information, business activities and management responsibility.

 

The Company operates in a single business segment, the marketing and licensing of brand names and trademarks for apparel, footwear and accessories. Cherokee’s marketing and licensing activities extend to brands that the Company owns and to brands owned by others. Cherokee’s operating activities relating to owned and represented brands are identical and are performed by a single group of marketing professionals. While Cherokee’s principal operations are in the United States, the Company also derives royalty revenues from the Company’s international licensees. Revenues by geographic area based upon the licensees’ country of domicile consisted of the following:

 

 

Long-lived tangible assets have been located in the U.S., Mexico and Asia with net values of approximately $876,  $250 and $51 as of October 31, 2015 and net values of approximately $794,  $299 and $72 as of January 31, 2015.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. For additional context with which to understand our financial condition and results of operations, refer to the MD&A for the fiscal year ended January 31, 2015 contained in our 2015 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on April 16, 2015, as well as the consolidated financial statements and notes contained therein (collectively, our “Annual Report”).  In addition to historical information, this MD&A contains forward-looking statements based upon our current views, expectations and assumptions that are subject to risks and uncertainties. Actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number of factors, including, among others, the risks described in Part II, Item 1A, “Risk Factors” and elsewhere in this report In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date we file this report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

 

As used in this MD&A and elsewhere in this report, “Cherokee”, the “Company”, “we”, “us” and “our” refer to Cherokee Inc. and its consolidated subsidiaries, unless the context indicates or requires otherwise. Additionally, as used herein, the term “Third Quarter” refers to the three months ended October 31, 2015; the term “Nine Months” refers to the nine months ended October 31, 2015; the term “Fiscal 2017” refers to the fiscal year ending January 28, 2017; the term “Fiscal 2016” refers to the fiscal year ending January 30, 2016; the term “Fiscal 2015” refers to the most recent past fiscal year ended January 31, 2015; the term “Fiscal 2014” refers to the fiscal year ended February 1, 2014 ; and the term “Fiscal 2013” refers to the fiscal year ended February 2, 2013.

 

We have a 52- or 53-week fiscal year ending on the Saturday nearest to January 31, which aligns us with our retail licensees who generally also operate and plan using such a fiscal year. This results in a 53-week fiscal year approximately every four or five years. Each of Fiscal 2015, Fiscal 2014 and Fiscal 2013 was a 52-week, 52-week and 53-week fiscal year, respectively. Certain of our international licensees report royalties to us for quarterly and annual periods that may differ from ours. We do not believe that the varying quarterly or annual period ending dates from our international licensees have a material impact upon our reported financial results, as these international licensees maintain comparable annual periods in which they report retail sales and royalties to us on a year-to-year basis.

 

We own the registered trademarks or trademark applications for Cherokee®, Liz Lange®, Completely Me by Liz Lange®, Hawk®, Tony Hawk®, Everyday California®, Flip Flop Shops®, Sideout®, Sideout Sport®, Carole Little®, Saint Tropez-West®, Chorus Line®, All That Jazz®, and others. All other trademarks, trade names and service marks included or incorporated by reference into this report, the accompanying base prospectus and any applicable free writing prospectus are the property of their respective owners.

 

Overview

 

Cherokee is a global marketer and manager of a portfolio of fashion and lifestyle brands it owns or represents, licensing the Cherokee, Liz Lange, Completely Me by Liz Lange, Hawk, Tony Hawk, Sideout, Carole Little, Everyday California , Flip Flop Shops and àle by alessandra brands and related trademarks and other brands in multiple consumer product categories and sectors. We are one of the leading global licensors of style focused lifestyle brands for apparel, footwear, home and accessories. As part of our business strategy, we frequently evaluate other brands and trademarks for acquisition into our portfolio. We enter into license agreements with recognizable retail partners in their respective global locations to provide them the rights to design, manufacture and sell products bearing our brands and to provide them our proprietary 360-degree platform. We believe our retail responsiveness process and 360-degree unique value proposition have allowed Cherokee to address the growing power of the consumer and the present and future needs of the retailers that are selling our portfolio of lifestyle brands. Based on consumer research, retail insights and brand insights that we continually measure, evaluate and incorporate into our 360-degree platform, we believe Cherokee has

become a key strategic partner to our licensees. We refer to this strategy as our “Direct to Retail” or “DTR” licensing model. As of October 31, 2015, we had thirty-three continuing license agreements covering both domestic and international markets, thirteen of which pertained to the Cherokee brand. In connection with our acquisition of the Flip Flop Shops trademark and related assets, we acquired, and became the franchisor under, franchise agreements with franchisees that have Flip Flop Shops retail stores located worldwide.

 

We derive revenues primarily from licensing our trademarks to retailers all over the world. Our current retail licensee relationships cover over fifty countries and over 9,000 retail stores and online businesses and include relationships with Target Corporation (“Target”), Kohl’s Illinois, Inc. (“Kohl’s”), RT Mart, Comercial Mexicana, TJ Maxx, Nishimatsuya, Sears Canada and Argos. Our two most significant licensees are Target and Kohl’s.

 

Recent Developments

 

Acquisition of Everyday California® Lifestyle Brand

 

On May 14, 2015, Cherokee consummated an asset purchase agreement with Everyday California Holdings, LLC, under which it acquired various assets related to the Everyday California® Lifestyle Brand and related trademarks. The consideration for the assets consisted of an initial cash payment and contingent cash payments dependent upon performance of the assets during Fiscal years 2017 and 2018.

 

Non-Renewal of Restated License Agreement with Target

 

On September 3, 2015, Target orally informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S which expires at the end of its current term on January 31, 2017.  Target confirmed the non-renewal in writing on September 4, 2015.  The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to Cherokee in Fiscal 2016 and Fiscal 2017 through its expiration. The Cherokee branded products in the school uniforms category will expire at the end of its current term on January 31, 2018, and Target will continue to pay the minimum guarantee through that period.

 

Target’s election to not renew the restated license agreement for the Cherokee brand in the U.S. triggered an event of default under our credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”). However, we and JPMorgan immediately entered into a forbearance agreement pursuant to which JPMorgan agreed that it would not exercise its rights or remedies under the credit agreement solely with respect to this event of default through October 12, 2015, and on October 13, 2015, JPMorgan waived this event of default in certain amendments to the credit agreement that were made in connection with our acquisition of the Flip Flop Shops brand, discussed below.

 

 

Acquisition of Flip Flop Shops

 

On October 13, 2015, we entered into a merger agreement (“Merger”) with Flip Flop Shops (“FFS”). Upon completion of the Merger, we, through our subsidiaries, own all rights to the Flip Flop Shops trademark and brand name, which is a franchise retail chain dedicated to offering the hottest brands and latest styles of flip flops, casual footwear and accessories, and we are the franchisor for approximately 90 existing Flip Flop Shops franchise shops located in the U.S. Canada, the Caribbean, the Middle East and South Africa and approximately 100 additional retail shops in development worldwide. Flip Flop Shops retail stores carry definitive assortments of recognized brands including OluKai, SANUK, Cobian, Havaianas, Quiksilver, ROXY, Reef, and many more.

 

 

In connection with the Merger with FFS, on October 13, 2015, we amended our credit agreement with JPMorgan to, among other things, (i) extend the maturity date of existing term notes and a line of credit note issued under the credit agreement to March 1, 2017 and (ii) issue a new term note to JPMorgan in exchange for the principal amount of the note of $6 million. As of October 31, 2015, our borrowings under the credit agreement totaled approximately $26 million in principal amount under three term notes, and we also have a revolving line of credit in

principal amount of $2 million available for future borrowings. See Note 4 to our consolidated financial statements included in this report for further information about our credit agreement with JPMorgan.

 

Expansion of Licensing Portfolio

 

In addition to our acquisition of the Flip Flop Shops brand name and related franchise relationships as described above, we have also acquired a number of new licensees for our brands in a variety of territories in our efforts to expand our licensing portfolio in existing and new markets. Below is a discussion of representative license agreements that we have entered into during Fiscal 2016 to date:

 

Cherokee

 

Walmart Canada

 

In September 2015, we entered into a license agreement with Walmart Canada. The agreement covers a broad assortment of Tony Hawk signature apparel, accessory and footwear categories for young men’s and boy’s sizes 4-20, which is expected to launch in the fall of 2016.

 

Sears Canada

 

In April 2015, we entered into a license agreement with Sears Canada Inc. The agreement covers a wide range of Cherokee products in the family lifestyle categories, including men’s, women’s and children’s clothing, footwear and accessories, and is planned to launch in the spring of 2016. Additionally, in May 2015, we entered into a new license agreement with Sears Canada covering Liz Lange maternity and sportswear, including expanded size ranges, to be sold in Sears Canada stores and online at www.sears.ca beginning in the spring of 2016.

 

Argos

 

In January 2015, we entered into a license agreement with Argos, a subsidiary of Home Retail Group plc, covering a broad assortment of Cherokee lifestyle products online, in catalogs and in more than 750 Argos stores across the United Kingdom and Ireland, which launched in late July 2015.

 

Hawk

 

Sports Direct

 

In March 2015, we entered into a license agreement with Sports Direct International plc to launch a broad assortment of Tony Hawk signature clothing and accessories online and in Sports Direct stores throughout Europe in the winter of 2015-2016.

 

Liz Lange

 

Sears Canada

 

In April 2015, we entered into a new license agreement with Sears Canada covering Liz Lange maternity and sportswear, including expanded size ranges, to be sold in Sears Canada stores and online at www.sears.ca beginning in the spring of 2016.

 

Everyday California

 

5 Horizons

 

In August 2015, we entered into a license agreement with 5 Horizons Group for our Everyday California brand. The agreement provides 5 Horizons the rights to manufacture and sell a wide assortment of branded Everyday California

products, including backpacks, bags, luggage, cold and warm weather accessories and select apparel products for adults and kids. Distribution will include specialty and department store retailers as well as resorts in the U.S., Canada and Mexico and select countries in South and Central America, Europe, the Middle East and Africa. Product is expected to launch in the spring of 2016.

 

NTD Apparel

 

In May 2015, we entered into a license agreement with NTD Apparel Inc. for our Everyday California brand. The agreement provides NTD Apparel the rights to manufacture and sell Everyday California branded products in certain apparel and accessory categories for adults and kids. The distribution will include specialty and department store retailers, as well as resorts throughout the U.S. and Canada. Product is expected to launch in the spring of 2016.

 

Critical Accounting Policies and Estimates

 

There has been no material change to our critical accounting policies and estimates from the information provided in our Annual Report.

 

This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition and deferred revenue, deferred taxes, valuation and impairment of long-lived assets, contingencies and litigation and stock-based compensation. Management bases its estimates on historical experience, anticipated results and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates.

 

We consider accounting policies relating to the following areas to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

 

 

 

 

 

 

You should refer to our Annual Report for a discussion of our policies on revenue recognition, deferred taxes, impairment of long-lived assets, contingencies and litigation and accounting for stock-based compensation.

 

See Note 2 to our consolidated financial statements included in this report for a description of recent accounting pronouncements.

 

Results of Operations

 

The following table sets forth for the periods indicated certain of our consolidated financial data.

 

 

Revenues

 

In the three and nine month periods ended October 31, 2015, our revenues totaled $8.1 million and $26.8 million, respectively, as compared to $8.7 million and $27.4 million in the three and nine month periods ended November 1, 2014. Revenues for the third quarter and nine month periods ended October 31, 2015 and November 1, 2014 were primarily generated from licensing our trademarks to retailers and, to a lesser extent, wholesalers and our share of licensing revenues from brand representation licensing agreements with other brand owners. The decrease in revenues between periods was principally due to the timing of transitions in the United Kingdom from Tesco to Argos for our Cherokee brand and in Canada from Target Canada to Sears Canada for our Cherokee and Liz Lange brands.  Revenues from Argos began in the third quarter of Fiscal 2016 and we expect revenues from Sears Canada to begin during the first quarter of Fiscal 2017. Additionally, the decrease is due to the strengthening of the U.S. dollar, which we estimate to be approximately $0.2 million during the Third Quarter and $0.6 million during the Nine Months.

 

Total worldwide retail sales of merchandise bearing the Cherokee brand totaled $332 million and $964 million and approximately $345 million and $1,008 million in the third quarter and nine month periods ended October 31, 2015 and November 1, 2014, respectively.

 

Because we do not have direct oversight over our licensees, we may not have all the information necessary to determine or predict the specific reasons why revenue may increase or decrease in any given period. Given our contractual royalty rate reductions as certain sales volume thresholds are achieved for Cherokee branded products and Hawk and Tony Hawk branded products in various product categories in the U.S., we expect that we will continue to record our highest revenues and profits in our first quarter and our lowest revenues and profits in our fourth quarter.

 

Revenues By Brand

 

The following table sets forth our revenues by brand for the three and nine months ended October 31, 2015 and November 1, 2014.

 

 

Geographic Revenues

 

The following table sets forth our geographic licensing revenues for the three and nine months ended October 31, 2015 and November 1, 2014.

 

 

U.S. and Canada

 

Our largest licensees in the U.S. generally are Target and Kohl’s, which together contributed 55% and 60% of our consolidated revenues for the Third Quarter and the Nine Months, respectively. In Canada, we are transitioning from Target Canada to Sears Canada for our Cherokee and Liz Lange brands.

 

Target currently has approximately 1,800 stores in the United States. Retail sales of Cherokee branded products at Target in the U.S. were slightly higher in the Third Quarter at approximately $259 million, up from $257 million in the third quarter of last year. Target pays royalty revenues to us based on a percentage of its sales of Cherokee branded products pursuant to our restated license agreement with Target. The restated license agreement is structured to provide royalty rate reductions for Target after it has achieved certain levels of retail sales of Cherokee branded products in certain product categories in the U.S. during each fiscal year. Target also pays fixed royalty rates for Target’s sales of Cherokee branded products in the adult merchandise category that are made by Target through its website (target.com) and sales of Cherokee branded products in the category of school uniforms. In addition, Target pays a fixed percentage of net sales of its products bearing the Liz Lange brand in the U.S.

 

Under the current terms of the restated license agreement with Target, the minimum annual guaranteed royalty for Target is $10.5 million and applies to all sales made by Target in the United States, other than sales of Cherokee branded products in the school uniforms category (which products are subject to a separate minimum annual guaranteed royalty of $0.8 million).

 

Royalty revenues from our Cherokee brand at Target, excluding sales of Cherokee branded products in Canada and Cherokee branded products sold in the school uniforms category, were $3.5 million and $12.5 million in the Third Quarter and Nine Months, respectively, which accounted for 41%, and 47%, respectively, of our consolidated revenues for such periods. Royalty revenues from our Cherokee brand at Target, excluding sales of Cherokee branded products in Canada and Cherokee branded products sold in the school uniforms category, were $3.5 million and $12.5 million for the third quarter and nine months of last year, respectively, which accounted for 40%, and 46%, respectively, of our consolidated revenues for such periods.

 

In September 2015, Target informed us that it would not renew the restated license agreement for the Cherokee brand in the U.S., which expires at the end of its current term on January 31, 2017. The restated license agreement with Target, including the existing royalty obligations, will remain in effect and continue to generate revenues to us in Fiscal 2016 and Fiscal 2017 through its expiration. If Target were to reduce its sales of Cherokee branded products prior to expiration of its license, even if Target continues to pay the minimum annual royalty of $10.5 million required under the restated license agreement with Target, any increased revenues we may receive from other licensees may not be sufficient to offset such a reduction in royalty revenues from Target.