Cherokee Scraps $40-Million Initial Public Stock Offering : Apparel: The Sunland fashion manufacturer cites Wall Street’s slide in canceling the sale.

Cherokee Inc., citing the stock market’s severe slump, said it scrapped plans to go public with a $40-million-plus stock offering.

The decision was not a surprise. Cherokee, a privately owned Sunland apparel maker that specializes in women’s sports clothing, had said last month that unless the market enjoyed a quick rebound, the company would probably cancel its offering.

Many companies, in fact, have been forced to withdraw or postpone initial public offerings because of the market’s slide. Investors, especially institutional investors such as pension funds, are refusing to buy new untested issues at a time when even the market’s blue chip stocks are taking a pounding.

Cherokee was particularly vulnerable because of the inherent fickleness of the fashion business, and the checkered health of the apparel industry’s customers, the retailers. However, some analysts have said Cherokee’s primary customers, such as the Mervyn’s department-store unit of Dayton Hudson Corp., are in relatively good shape.

Some aspects of Cherokee’s offering also might have put off some investors. Cherokee offered 4 million shares of Class B stock that it expected to sell for between $10 and $12 a share, raising between $40 million and $48 million.

However, the Class B shares would have had only a 10th of a vote each, compared with the full vote accorded each of Cherokee’s Class A shares, which are held by Cherokee’s current owners and executives. In other words, buyers of the Class B stock would have contributed significant equity to Cherokee, but would have had very little impact on Cherokee’s governance.

Cherokee planned to use the offering’s proceeds to whittle down its debt, which totaled $171.1 million as of June 2, when its fiscal year ended. (In fiscal 1990, Cherokee lost $224,000 on sales of $208.6 million; the loss stemmed from $28.1 million in debt interest costs.) Now, the company will have to find other means of paring the debt.

Most of the debt was incurred last year, when a group led by Cherokee executives and investment banker Jeffrey S. Deutschman bought the then-publicly held company from its stockholders in a $174-million leveraged buyout. In a leveraged buyout, the company is purchased with mostly borrowed money secured by the company’s assets.

Cherokee had stated in filings with the Securities and Exchange Commission that even without the offering, the company’s operations generate enough cash to cover Cherokee’s debt payments.

The canceled offering also means Cherokee President Robert Margolis and Cherokee’s other owners will be deprived of a paper profit of more than $40 million. The executives were not planning to sell their stock in the offering, but had the sale gone through, the market value of their stock--at $10 to $12 a share--would have been $40 million higher than what they originally paid for the shares.

But Cherokee’s executives aren’t hurting. Cherokee paid Margolis a $1.2-million bonus in fiscal 1990 in addition to his $400,000 salary, according to Cherokee’s annual financial report to the SEC. All of Cherokee’s eight executive officers were paid a total of $2.84 million in bonuses that year.