Apparel maker Cherokee suffers steep stock drop.

Heavy debt likely to trigger another Chapter 11 filing

The 1980s may be long gone, but for Cherokee Inc., the lingering aftereffects o debt-mongering have yet to end. And those aftereffects caused the company's stock to be the worst performer this summer among small public companies based in L.A. County.

The debt burden accumulated by the Sunland-based maker of women's apparel continues to weigh heavily, despite the company's debt restructuring and reemergence from Chapter 11 bankruptcy protection in June 1993.

Two recent announcements have hammered Cherokee's stock value. In July, Cheroke announced it would be unable to make a $75 million debt payment due in November In early September, the company said it would again restructure, and acknowledged another Chapter 11 filing seems likely.

The blasts of bad news torpedoed Cherokee's stock price, which sank to $0.375 a share on Aug. 31, down from $2.25 three months earlier.

The financial turmoil at Cherokee is the latest in a series of crises for a company wrestling with declining sales, at a time when a new management team ha been working hard to reposition Cherokee's product line.

Facing criticism for a product line that lacked focus and market identity, as well as retailer complaints that the company was slow to restock, the company i September 2693 hired Joe Elles, a marketing expert who was formerly vice president and general manager of jeans maker Lee Apparel Inc.

Elles' primary objective has been to reshape Cherokee's product line, an objective he has been pursuing with vigor.

He scrapped the company's Indian-head logo, and discontinued many items of novelty clothing for both men and women, choosing instead the back-to-school market in casual women's wear.

"We have gone with more volume-oriented products vs. the niche products. My input on the product line is on 'retail right now,'" that is, on clothes that are well tuned to the tastes of the moment, he added.

Elles said he has been pushing for a sharper focus in Cherokee's product lines. "We wanted to be in a core market of casual bottoms and casual tops," said Elles, explaining that those clothing lines are focused on sales volume.

To gain more market share, Elles said he has focused his price points in the $25-to-$34 range, and is intent on under-pricing the market leaders in denim wear, Lee Apparel and Levi Strauss & Co.

Already, Elles has won back some retailers who were put off by Cherokee's forme lines, most notably Broadway Stores Inc., parent of The Broadway department store chain.

Despite what Elles described as "great reviews" from retailers, Cherokee sales are still disappointing. For the fiscal year ended May 28, the company reported net sales of about $114 million, down from about $157 million the previous year and far short of the company's top sales of $277 million in 1991.

While Cherokee's retail strategy may seem promising, its financial strategy seems to be unraveling. In June 1993, the company's bondholders agreed to allow cash-strapped Cherokee to make up to three interest payments through "pay in kind" consideration. These "pay in kind" consideration were made in the form of new notes issued to bondholders.

That permission to pay bondholders with new notes has since expired, but the company does not have enough cash to resume the interest payments. One industry observer questioned the wisdom of the "pay in kind" strategy, also known as PIKs.

"What happens with PIK securities is that they stall things for a while, but in the process, they raise your debt," said Sid Rutberg, financial editor at Women's Wear Daily in New York. Cherokee, he added, is "paying out additional notes instead of paying out money. When it comes time to pay out money, the deb is larger and the interest costs are proportionately higher."

The root of the company's problems can be traced back to 1986, when since-disbanded investment firm Deutschman Clayton & Co. bought all of Cherokee's common stock in a $174-million leveraged buyout underwritten by investment banking firm Drexel Burnham Lambert Inc., which has also since disbanded. A subsequent restructuring lightened Cherokee's debt from $190 million to $62.5 million. But even that reduction was not enough to restore buoyancy to the 20-year-old company.

As part of the latest restructuring, the company is negotiating with its bondholders. Cary Cooper, Cherokee's chief financial officer, refused to disclose the identities of the company's institutional bondholders other than t say they are "two major mutual funds."

"We are very close to making an agreement with them to exchange debt for equity," said Elles. He added that Cherokee has retained a financial advisor, Chanin & Co., and said he is "optimistic that there will be a successful restructuring by the end of this fall."

Despite its travails, Cherokee apparently retains the confidence of some notabl investors, including Guess? jeans co-founder Georges Marciano, who owns nearly 20-percent equity stake, Lion Advisors (headed by a group of ex-Drexel investment bankers) with a 15-percent stake and Saudi businessman Abdullah Taha Bakhsh with a 12-percent stake.