Shares of Iconix Brand Group Inc. retreated Tuesday despite a healthy third-quarter showing as investors digested a weak outlook and confirmation of a partnership with Marc Ecko Enterprises Inc. and its stable of brands.
For the quarter ended Sept. 30, Iconix reported profits of $20.5 million, or 28 cents a diluted share, 24.6 percent better than a year ago, when net income totaled $16.4 million, or 27 cents a share. Revenues in the quarter increased 7.6 percent to $59.4 million from $55.1 million in the comparable 2008 period. Revenues included a $3.7 million benefit from the sale of its Joe Boxer trademark in Canada.
Adjusted EPS of 31 cents was 3 cents better than the consensus estimate of 28 cents, according to Yahoo Finance.
Separately on Tuesday, Iconix said it had entered an agreement to take a majority stake in the Ecko Unlimited, Marc Ecko and Zoo York trademarks and other intellectual property owned by Marc Ecko Enterprises through a new joint venture.
Neil Cole, chairman and chief executive officer of Iconix, said on a conference call with analysts that some components of the Marc Ecko portfolio “could lend themselves easily to our direct-to-retail model.”
Iconix said it will acquire the Ecko trademarks through a joint venture, of which it will have a 51 percent stake, with MEE holding the remainder. The company will pay $63.5 million in cash to fund the deal. The new venture will obtain an additional $90 million in financing, making Iconix’s effective purchase price $108.5 million.
Cole said he expects the brands to generate gross royalty revenues of $45 million to $47 million a year after the deal closes in the current quarter. Co-founder Marc Ecko, who will continue in his role as chief creative officer, will receive an estimated $3 million of those royalties annually.
In a memo sent to employees Tuesday, Ecko, co-founder and ceo Seth Gerszberg and Zoo York president Marci Tapper wrote that the firm struck the deal to pay down debt and reposition for growth. The executives wrote that Marc Ecko Enterprises will operate as a global licensee of the brands and pay royalties to the joint venture.
“All major decisions such as marketing, distribution and product extensions require unanimous consent,” they wrote.
The company “will continue to own and operate 100 percent of our domestic and international wholesale, retail and e-commerce businesses,” the note continued.
Iconix stock fell 99 cents, or 7.4 percent, Tuesday to close at $12.38, as some in the investment community questioned the merits of the Ecko deal while others worried over what they saw as soft guidance in the coming year.
“While the purchase is accretive and should help the overall company in terms of providing solid European exposure, we are not fans of the ownership structure and, frankly, question the need for another streetwear brand, given the company’s ownership of Rocawear and Ed Hardy,” wrote Brean Murray, Carret & Co. analyst Eric Beder in a research note.
However, at Lazard Capital Markets, analyst Todd Slater seemed pleased to see the brand owner seeking out deals. He wrote, “With [Iconix] back in acquisition mode, and what appears to be conservative EPS guidance, we see a built-in cushion in its earnings outlook.”
The firm said it expects to earn between $1.25 and $1.30 a share in 2010, below the $1.34 analysts’ consensus estimate.
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