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Bear of the Day: Cherokee Inc. (CHKE)

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Cherokee Inc. (CHKE - Free Report) is one of those names in the retail industry that you’ve likely seen in the aisles of stores like Kohl’s (KSS - Free Report) , Target (TGT - Free Report) , and Walmart (WMT - Free Report) .

The company has an extensive brand portfolio, including its namesake Cherokee, Tony Hawk, Hi-Tec, Everyday California, Liz Lange Maternity, 900 Tony Hawk, Point Cove, Carole Little, and Sideout, among others.

The broader retail sector is hot right now—U.S. year-end holiday retail sales rose 4.9% compared to the same period last year—but the Zacks Rank #5 (Strong Sell) Cherokee, unfortunately, is a retailer that has yet to rebound.

Big Third Quarter Miss

Last quarter, Cherokee reported a loss per share of 5 cents, missing the Zacks Consensus Estimate of 7 cents per share and representing a negative earnings surprise of 171.43%.

Non-GAAP net loss for the quarter was $740,000 compared to non-GAAP net income of $5.6 million in the prior-year period.

Revenues came in at $11 million, just beating our consensus and were comprised of royalty revenues and indirect product sales; royalty revenues were $7.9 million.

Adjusted EBITDA was $928,000 for the quarter compared to $1.6 million in the year ago period.

Cherokee also said that it had cash and cash equivalents of $4.6 million as of Oct.28, 2017.

Adjusted Outlook

As a result, Cherokee adjusted its previously issued guidance for fiscal 2018.

The company now expects gross profit to be in the range of $34 million to $37 million, with adjusted EBITDA between $6 million and $9 million.

Cherokee also provided guidance for its fiscal 2019. It expects gross profit in the range of $34 million and $39 million, with adjusted EBITDA between $7 million and $11 million.

Earnings in Decline

Cherokee’s bottom line is in a slump at the moment, and this decline doesn’t seem to be going away any time soon.

For the current quarter, earnings are expected to decrease over 53%, with sales slumping almost 37% in the same time frame.

The rest of fiscal 2018 doesn’t look too bright either; earnings are projected to tumble in the triple digits from the prior year, and the Zacks Consensus now sits at -$0.10, down from $0.10 just 30 days ago.

However, Cherokee’s earnings are anticipated to rebound in fiscal 2019, growing 50% year-over-year.

Shares Down on the Year

Shares of Cherokee have fallen over 80% year-to-date compared to the S&P 500’s return of about 18%,

Cherokee Inc. Price and Consensus

Cherokee Inc. Price and Consensus | Cherokee Inc. Quote

Cherokee has no P/E, since it is currently a loss-making company, but its P/S of 0.55 comes in below its industry average of 1.1.

In its third quarter earnings report, Cherokee CEO Henry Stupp said that the company is making “meaningful” progress in its key business and financial initiatives, as well as amending its loan agreement with Cerberus.

He also said that the retailer is working to identify opportunities to improve its operating and financial performance, especially reducing expenses and growing cash flow.

If Cherokee can execute these growth objectives smartly and efficiently, the company’s profit slump could come to an end.

For investors looking for an apparel stock with more growth potential, they may want to consider athleisure giant Lululemon (LULU - Free Report) , a Zacks Rank #1 (Strong Buy) company that anticipates 21.2% earnings growth for the current quarter.

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