Cherokee announced the acquisition of Flip Flop Shops, a franchiser of casual footwear retail stores. While deal terms were not disclosed, we expect a material boost to revenue given 90-plus existing stores and pent-up demand for more than 100 locations. We also see opportunities for shop-in-shops in India and China, and the selling of footwear from Cherokee’s existing brands at franchise stores. We reiterate our Buy and are raising our price target to $22.
Buying Flip Flop Shops. CHKE acquired Flip Flop Shops, a franchiser of specialty retail stores offering casual footwear and accessories. Terms of the transaction were not disclosed. Notably, Cherokee remains committed to its no-inventory, no-manufacturing risk strategy.
A Franchise Specialty Retail Chain. Founded in 2004 and franchising since 2008, Flip Flop Shops has more than 90 retail franchises across the US, Canada, Caribbean, Middle East and South Africa. Stores mainly offer flip flops and sandals from a wide array of brands, including Olukai, Sanuk, Cobian, Havianas, Quiksilver and Reef, among others.
Setting Up For Significant Growth. With over 100 shop locations already in development, we see a near-term opportunity to significantly accelerate near-term build-outs with more resources dedicated to site selection and lease signings. CHKE plans to utilize its existing relationships to expand the footprint in Europe, Latin America and Asia, with a seemingly notable opportunity for shop-in-shops in India and China. Ultimately, we see the potential for up to 1,000 stores worldwide, especially given a seemingly attractive economic model for franchisees owning multiple locations through master agreements. Beyond that, we would expect Flip Flop Shops to begin offering casual footwear from Cherokee’s existing portfolio of brands – thereby providing an additional boost to royalty revenue.
Expecting A Material Boost To Revenue. We estimate a 5%-plus contribution to Cherokee’s reported revenue from the addition of Flip Flop Shops’ 90-plus stores and a 10%-plus boost once the company capitalizes on existing pent-up demand for 100 more stores. These projections assume annual sales/store of $350,000, a 5.0% weekly royalty, and a 0.5% weekly brand building and marketing fee, but exclude the initial franchise fee of $35,000.
Beginning To Offset Recent Loss Of Target With Growth In Other Areas. We view this news positively, especially as Cherokee looks to replace its namesake brand’s revenues from Target before its licensing agreement expires in January 2017. Shares have bounced off recent lows, but still trade at 13.8x CY16E EPS and an estimated mid-to-high-20s adjusted multiple assuming none of Target’s revenues are replaced by January 2017.
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