After 20 years, Target ends ties with major apparel supplier

New York -- As Target Corp. continues its transformation under CEO Brian Cornell, news came out that the retailer is not renewing its contract with licensed apparel company Cherokee.



Dependent on Target for 43% of its revenue, Cherokee Global Brand saw its market value obliterated after it disclosed Target would not renew the decades-old relationship.



Publicly held Cherokee, bills itself as a marketer and manager of a portfolio of fashion and lifestyle brands including Cherokee, Carole Little, Tony Hawk, Liz Lange, Everyday California and Sideout. It has license agreements with best-in-class retailers and manufacturers covering in more than 40 countries. In reality, however, the company’s business was far less diverse than implied by the boilerplate language the firm uses to describe itself.



In 2014, licensed revenues from the sale of the Cherokee brand at Target accounted for roughly 43% of the company’s total revenues. The reliance on Target was even more dramatic in 2013 and 2012 when the retailer accounted for 53% and 57% of Cherokee’s revenues, respectively.



In regulatory filings, Cherokee warned that replacing royalty payments from Target would be a significant challenge and termination of its agreement, set to expire Jan. 21, 2017, would have a material adverse effect on revenues and cash flow.



What exactly a “material adverse effect” looks like became apparent the morning of Sept. 11, after late the prior day company disclosed that Target had in fact terminated is agreement in conjunction with the release of weak second quarter results. Shares of the company tumbled and roughly 30% of its market capitalization vanished. The huge sell off should serve as a cautionary tale for any supplier reliant on a single retailer for a disproportionate amount of their revenue, especially one prone dramatic strategic changes that accompany a change in senior leadership like Target had last year when Brian Cornell was named chairman and CEO last year.



“Moving forward, Cherokee Global Brands is in a strong position to enter into new platform partnerships that will expand Cherokee's presence in the U.S.," said Henry Stupp, Cherokee’s CEO. "Large-scale retailers and wholesalers have frequently expressed interest in the Cherokee brand based on its multi-category relevance and high consumer awareness. In the end, though, consumers make brands successful, and we know that Cherokee has a unique connection with many millions of consumers in the U.S. and around the globe."



Despite some progress in reducing its reliance on Target the past three years, the diversification hasn’t happened fast enough. The company’s second quarter revenues fell 3% to $8.5 million and net income declined to $1.9 million, or 22 cents a share, compared to $2.3 million, 27 cents a share, the prior year.



"Cherokee Global Brands continues to focus on the development of our global brands, creating value for our licensing partners and generating strong financial returns for our shareholders," Stupp said.