Cherokee Inc.

6835 Valjean Avenue
Van Nuys, California 91406
U.S.A.
(818) 908-9868
Fax: (818) 908-9191

Public Company
Incorporated: 1973
Employees: 15
Sales: $13.9 million
Stock Exchanges: NASDAQ
SICs: 6794 Patent Owners & Lessors

Cherokee Inc. is a licenser whose namesake brand appears on clothing, housewares, accessories, footwear, and other consumer goods in retail outlets around the world. During the first half of its 26-year history, the company evolved from a tiny shoe repair shop into a highly profitable, multimillion-dollar manufacturer of shoes and apparel. Heavy debt from a management-led leveraged buyout in the late 1980s led to multiple bankruptcy reorganizations. In the mid-1990s, the scaled-back company staked its future on the cultivation of the Cherokee label as a “megabrand” and the creation of a global licensing operation. In the process, Cherokee’s sales have shrunk from a high of $236.9 million in 1991 to just under $14 million in 1995. After scoring annual profits of more than $10 million in the late 1980s, the firm failed to record a single year in the black from 1990 to 1995.

Corporate Foundations in 1970s

Cherokee was founded in 1971 by James Argyropoulos. With his family—including a twin brother—“Argy” had emigrated to Chicago from Greece in 1958 at the age of 14. Over the next four years, he learned the English language in high school and the shoemaking trade from his father. But Argy was not interested in becoming a cobbler when he graduated. At 18, he moved to Los Angeles to pursue a career as an electric guitarist for a rock ‘n roll band. He chased that dream for about four years, until the financial demands of a new wife and baby drew him back into the footwear business.

Argyropoulos launched a shoe repair shop in 1968, and like his father before him was soon selling custom-made footwear to “hippies and flower children” from his Venice, California, garage. His comfortable leather and wood shoes, sandals, and clogs were embellished with hand-painted symbols. Especially popular was a geometric Indian motif. With orders growing, Argy founded the Cherokee Shoe Co. in 1971 and incorporated two years later.

Over the course of the 1970s, the twenty-something entrepreneur expanded his line to include sandals with an injection-molded sole known as the “Beep Bottom,” as well as closed shoe lines. With orders from national department store chains like Macy’s, Bloomingdales, and Dayton-Hudson, Argyropoulos was able to increase his production to 1.5 million pairs per year. Sales volume tripled from 1979 to nearly $34 million in 1980. It was around this time that the entrepreneur decided to pursue a major brand extension.

Union with Robert Margolis in 1983

Argyropoulos found a like-minded entrepreneur in skiing-buddy-turned-business-partner Robert Margolis. Margolis brought with him another partner, Jay Kester, and about a decade of experience in the bargain clothing segment. The three formed a joint venture, Cherokee Apparel Inc., in 1981. In acknowledgment of his new colleagues’ expertise in the clothing industry, Argyropoulos put up 75 percent of the start-up funds, but only kept a 55 percent stake in the new affiliate.

Writing for Forbes magazine in 1986, journalist Ellen Paris described Argyropoulos and Margolis as “a natural fit,” noting that “Margolis’ contacts with the apparel buyers opened up shelf space for Cherokee shoes at important accounts like Burdine’s in Florida. And Argyropoulos’ shoe account contacts cleared rack space for Margolis’ apparel lines in a chain like Nordstrom.”

Growth Follows 1983 Initial Public Offering

With a focus on women’s and children’s apparel, sales at the new affiliate soon outstripped shoe revenues, growing from $15.1 million in 1983 to $51.6 million in 1984. In 1983, Argyropoulos took Cherokee Shoe public and used $5.3 million of the $9 million proceeds to retire short-term debt and acquire the remaining 45 percent of Cherokee Apparel Corp. he did not own. The initial public offering was structured so that the principals would gain some cash without relinquishing control: the founder retained a one-third stake in his company, his twin brother Arthur Argyris (who had Anglicized his name) held another 10 percent, and Margolis (who became president of the reincarnated Cherokee Inc. in 1984) owned about 6 percent.

The partners used several strategies to bring their brand to national status in the early 1980s. National advertising via print and television helped support the company’s business with nationwide department stores. Argyropoulos also hoped to expand a fledgling chain of Cherokee stores from its roots in California into a nationwide chain of 100 franchised outlets by the end of the decade.

By mid-decade it was apparent that brand licensing had become a very successful and prolific program. In exchange for a royalty of 7 percent—2 to 3 percent of which was earmarked for the corporate advertising budget—Cherokee sold other clothing manufacturers the right to use the trademark and Indian head logo on everything from menswear to accessories and children’s clothing. By 1986, the company had over a dozen licensees, including international affiliates in New Zealand, Australia, and Canada.

In keeping with its thoroughly American name and image, all of Cherokee’s clothing and footwear was made in the U.S.A. (The company did make a brief stab at importing, but soon found that Californian immigrant labor made up for its relative expense with quick turnarounds and reliable quality.) At the time of the merger, the company’s sales ratio was about 60 percent shoes, 40 percent apparel. Within two years, that equation was turned on its head, with 65 percent of sales generated from women’s clothing. Along with this corporate transformation came skyrocketing annual sales and a mounting stock price. Revenues tripled from $33.97 million in 1980 to $104 million in 1986, and net income multiplied tenfold, from $690,000 to $6.8 million during the same period. A tripling of Cherokee’s stock price during this period left some analysts eagerly speculating that the apparel company was “another [Liz] Claiborne.”

Forbes ’s Paris wrote admiringly of Argyropoulos’ innate business sense, noting that while he was “only” a high school graduate, he was “what many eager business school applicants think they can somehow learn to be—a successful entrepreneur, creator of a dynamic business. We wish them luck. Entrepreneurs of this type are born, not made.” Of course, Paris could not have predicted that those “eager business school” types would later cut the natural out of his own company.

Early in 1986, Argyropoulos announced ambitious financial performance goals for the remainder of the decade, among them 20 percent annual sales and earnings growth. That April brought a secondary equity offering totaling 2.5 million shares, 700,000 of which had been held by the principals. The cash-out reduced Argyropoulos’ stake to 15 percent, while Argyris and Margolis held on to 1 percent each. Cherokee used part of the proceeds to purchase a controlling interest in clothing manufacturer Code Bleu from Bayly Corp. in December 1987 and outright control of shoemaker Pallmark International two months later.

Cherokee exceeded its founder’s goals in fiscal 1987 (ending November 30), achieving year-over-year increases of 34 percent in sales and 53 percent in earnings. And while sales growth fell somewhat short of projections, at 16.6 percent on the 1988 fiscal year (which, since it ended May 31, overlapped the previous period), profits continued their upward climb at a 23 percent rate, to $12.8 million. It was the most prosperous 12 months in Cherokee’s history, and would be its last profitable year for quite some time.

Leveraged Buyout in 1988

With the aid of investment firm Deutschman & Co.’s Green Acquisition Co., Cherokee president Robert Margolis led a corporate mutiny against Jimmy Argyropoulos in May 1988. The $150 million, $12.50 per share bid offered to exchange shares in the newly-formed Green Acquisition for Cherokee shares held by officers and directors Margolis, Jay Kester, and Cary Cooper, making them the principal officers of the privately-held Green in the process. The offer made no mention of Argyropoulos, even though he continued to own about 14.5 percent of the company.

When a special committee of Cherokee’s board of directors rejected the bid in June, the executives—this time joined by Argyropoulos—brought a second, $13 per share, $156 million, offer to take the company private. By July, however, Argy had defected, asserting that the high debt the managers would have to assume in order to buy out their fellow shareholders would hamstring the company and require severe layoffs and other cutbacks. The special committee of the board agreed and rejected this second offer in August.

The third time proved a charm for Green Acquisition. In September, its $173.6 million bid for control was approved over the “nays” of Argyropoulos and a small cadre of loyal directors. Unwilling to admit defeat, the founder sought a “white knight” and solicited a court injunction to block the takeover, but both efforts were fruitless. Argy resigned from Cherokee that October, no doubt taking some solace in a $31 million settlement.

Company Perspectives:

As “dress down Friday” continues to sweep the nation, casual clothes are becoming more important. Now, corporate America is learning what CHEROKEE customers have known for years. When it comes to casual dressing—no one does it better than CHEROKEE!

Margolis and company’s leveraged buyout proceeded in two steps: in October 1988, the group paid about $84.7 million for a 50 percent stake. Green acquired the remaining equity for $13.99 per share ($12 cash and an unsecured $1.99 per share bond) and merged the company in May 1989. This privatization process was financed almost entirely with debt, loading Cherokee with over $170 million in long-term liabilities. Interest on the loans was set at 15.75 percent.

Losses, Bankruptcy Reorganizations in Late 1980s, Early 1990s

Debt service proved a powerful impetus for growth in the post-LBO era. Cherokee adopted several new strategies and revised some old ones in its quest for increased cash flow. In an effort to raise sales volume, the clothing company began to lower its wholesale prices and concentrate more on mass merchandisers like Mervyn’s and Wal-Mart, and less on its traditional department store customers. A long-resisted shift to overseas production helped cut production costs. Cherokee vastly increased its licensing programs as well, accumulating a total of 26 licensees authorized to make everything from belts to beach towels by 1989. Overseas licenses were a particular focus. By the end of the decade, the company had added affiliates in Mexico and Japan. Corky Newman, president of marketing and licensing, predicted that “The Cherokee label will be a dominant label in the Nineties and the Nineties is a decade of the megabrand,” in a September 26, 1989 WWD article. The company also boosted its advertising budget from about $3 million in 1990 to $7 million in 1991.

While these efforts succeeded in increasing Cherokee’s sales from $156.2 million in fiscal 1988 to over $236.9 million in fiscal 1991, the company lost over $2 million in the ensuing years, ending the latter year with a “negative tangible book value of $126.2 million.” Despite an injection of cash from a public offering of 2.5 million shares at $6.50 each in early 1991, the company continued to struggle with its debt. In November 1992, Cherokee missed an interest payment on the $105 million liability that remained, and was forced to enter Chapter 11 bankruptcy negotiations with its creditors. The company emerged from the proceedings June 1, 1993, having reduced its annual fixed charges by $14 million.

Margolis resigned Cherokee’s chairmanship and chief executive office that November, citing familial responsibilities and a desire to “pursue other entrepreneurial opportunities.” Jay Kester, Margolis’s long-time partner and Cherokee’s president of worldwide marketing, followed suit later that month, giving virtually identical reasons for his departure. The board of directors selected Bryan Marsal, a management consultant, to act as interim CEO and hired Joseph M. Elles as president. Formerly general merchandising manager at Lee Apparel Co., Elles implemented several strategies in the hopes of getting Cherokee back on track.

A label overhaul abolished Cherokee’s Indian-head logo, which Elles thought was inappropriate for the politically-correct 1990s. In an effort to streamline production, he eliminated 75 percent of the company’s styles to focus primarily on jeans. He also instituted a market research program, increased the advertising budget, and raised inventory levels to better serve the department stores that he hoped to target. As he told WWD’s Janet Ozzard in January 1994, Elles had high hopes for Cherokee, noting that “it would be a disappointment if we did not run substantial double-digit [sales] growth” in the ensuing year. But these hopes evaporated along with Cherokee’s revenues in the ensuing months. Results for the year ending May 31, 1993, showed a 19 percent decline in sales to $157.3 million and a near-doubling of its annual shortfall to $20.3 million. The disparity only grew worse in the following year, with revenues declining to $114.1 million and a $24.8 million loss. Elles resigned in November 1994 as the company once again sought bankruptcy protection.

His successor, Jim Novak, joined WWD’s Kim-Van Dang in blaming high inventory costs for pushing the company into its second bankruptcy reorganization in as many years. Commenting for an April 1995 article, Novak said that “It was not a bad idea, but this company is not financially structured to handle [costly inventories]. The support was not here for him.” Novak resurrected Cherokee’s Indian-head logo and planned to reinstate many of the company’s trouser and shirt lines, but early in 1995 former chairman and CEO Robert Margolis re-emerged with a radically different idea.

Licensing Sole Focus Beginning in 1995

By this time, Margolis had accumulated about one-fourth of Cherokee’s devalued stock via an investment group. It only seemed natural for him to accept bondholders’ requests that he reprise his role at the troubled company’s helm. He started with a corporate “garage sale,” pawning off everything from sewing machines to buttons and even the proverbial “garage,” a 110,000-square-foot factory. Margolis used the $20 million proceeds to eliminate Cherokee’s remaining debt. The elimination of all manufacturing operations shrunk the company’s payroll from over 400 in 1993 to less than two dozen in 1995 and reduced its overhead to less than $2 million.

Margolis based his new strategy, which he dubbed “private label with a label,” strictly on licensing the Cherokee brand and logo. But the company would not limit its client base to manufacturers, as it had in the past. Instead, it sought “strategic alliances” with retailers, to whom it would license the brand for whole categories of soft goods. This tactic followed the successful lead of such retailer-owned brands as J.C. Penney’s Arizona and Wal-Mart’s Kathy Lee. Cherokee’s first major deal in this vein, a 1995 agreement with Dayton Hudson Corporation’s Target chain, guaranteed it a minimum of $5.5 million in royalties for the fiscal year ended that May.

By 1997, Margolis could point to several signs that his innovative program was succeeding. The company had about 30 licensees, several of whom had confidently signed on since the latest corporate reincarnation. In January, the company announced net income of $2.8 million on sales of $3.7 million for the six-month period ending November 1996. The company optimistically instituted a quarterly dividend early that year, and forecast that it would have $8 million cash and be unencumbered by debt at year-end (May 1997).