Iconix (ICON) is an asset light brand manager. Basically they have no inventory, no manufacturing, few employees, and very little in the way of capex, but license their brands out to manufacturers of clothing, coffee mugs, bumper stickers, and anything else you can think of. They own the rights to 28 brands now, some of which are enduring like the Peanuts brand, some of them which are more dated and of questionable longevity like Ocean Pacific, or OP, and some of which are more modern with less of a track record like Rocawear.
The company has been growing at a rapid clip as it aggressively acquires brands with revenues increasing from $160M in FY07 to $370M in FY11. The company has taken on debt to help fuel this growth which I don’t love, but their asset light model allows most of net income to drop to FCF, so interest is well covered.
This morning they reported EPS of .43 vs .45 estimates and revenue of $88.5M vs estimates of $95.1M. Additionally they guided FY12 to $340-350M vs previous guidance of $370-385M and street estimates of $377.5M.
On their call management blamed a change in their Royal Velvet brand license with JC Penney and weak sales from men’s brands, specifically Rocawear and Ecko for the disappointing quarter, and a $10M hit to guidance. The company also pointed to changes in planned international initiatives which they no longer expect to complete. They had been hoping to buy complete control of some joint ventures, but they now consider gaining control to be too costly, resulting in a $20-25M hit to guidance. Investors focused on the next quarter or year are clearly not happy about this, but for an investor who is focused on the long term, this is a tremendous positive as it shows management’s discipline in allocating cash – very important for a company with gobs of cash, high debt, and planned growth. I’d rather see the stock trade off then see them waste cash and destroy value by over paying for near term revenue juice.
I don’t want to give them too much credit at this point b/c I haven’t looked past the headlines, but at a glance it also looks like in 2008 the company was buying back stock at prices below $10, and then later issued shares in mid 2009 at $15. This may have just been luck, but it may have been shrewd. Something to look into further.
While the company remains focused on the long term for their acquisition strategy, they are focused on the short term in SG&A and have identified ~$10M in cuts that will offset the above mentioned challenges. Importantly these cuts are not coming on the marketing end.
The company plans to continue its expansion and seems to have the cash flow to do it, although critics point to a diminishing number of available brands. They do have a $287.5M convert coming due at the end of june, but they have a revolver they can access to pay that off if needed.
On the negative side, management ownership is limited, and they haven’t been buying shares in recent memory, although they do get shares as compensation which disincentives them from buying in the open market. Additionally, while it looks like cash flow is pretty even, at a glance it seems as if their licensing agreements are up for renewal on a fairly regular basis, and anyone of them could be cut off at the knees on fairly short notice… and despite the “value” of these brands, they are really only worth what you can make from them in most cases so without licensing deals in place its not like they are a rock on the balance sheet. I suppose this helps explain why the company trades at below book value – something rarely seen in a branded business. Basically the brands as a whole are not all that strong, but most asset light businesses can earn a high ROE fairly easily and this business should trade above book in my opinion.
As for another valuation thought… the company is forecasting $180M in FCF for 2012 which as of now translates into a 17% FCF yield. Cheap if you believe the forecast.
Also worth noting the – company does have a share repurchase plan in place. As of 10/11 it was $200M and it has $146M remaining.