NEW YORK — After swallowing Mossimo and Ocean Pacific, Neil Cole and his team at the Iconix Brand Group are still hungry for acquisitions.
The company plans additional licensing deals for the nine brands under the Iconix umbrella. But its appetite for more remains and the firm will need to boost its portfolio to help propel earnings per share toward the lofty growth goal of 15 to 20 percent.
"Looking beyond 2007, [our goal is to grow] earnings per share at least 15 to 20 percent year-over-year, and we are committed to achieving this goal,'' Cole, chairman and chief executive officer, said during a third-quarter conference call on Wednesday. "Our growth over the last two years is very exciting....We have only scratched the surface of the potential of our 21st-century business model."
"The pipeline of potential acquisitions remains strong," Cole said. He noted that the company is looking at several opportunities and expressed confidence that the brand management firm can "continue to grow the portfolio with more iconic consumer brands."
Cole told WWD that he was pleased with the purchase, announced Tuesday, of Ocean Pacific from the Warnaco Group for $54 million. "It's a great iconic brand with a 30-year heritage," he said. "It will bring more diversity to Iconix and is a different lifestyle brand than some of our other brands that are more fashion-oriented."
Cole said Op, a leading global action sports lifestyle company, has expansion opportunity, particularly on the sportswear side of the business for young men's and juniors. "In our research, the brand is still underpenetrated in every area," he said.
The Op deal came a day before Iconix reported quarterly results. Net income for the three months ended Sept. 30 rose 54 percent to $7.9 million, or 18 cents a diluted share, from $5.2 million, or 14 cents, in the same quarter a year ago. The company beat Wall Street's consensus by 2 cents. Licensing and commission income more than doubled to $22.1 million from $9.2 million. The quarter was the company's first fully taxed quarter as a brand management firm.
For the nine months, net income increased to $23.6 million, or 54 cents a diluted share, from $8.5 million, or 26 cents, in the year-ago period. Licensing and commission revenue was $53.8 million, up from $17.8 million.Iconix has completed six deals in the last six quarters, some when the company was known as Candie's Inc. Brands under the Iconix umbrella are: Candie's, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, and by the end of the month, Ocean Pacific.
Eric Beder, of Brean Murray Carret & Co., said in a research note, "We are raising our target price to $21 (from $20) and upping our 2006 and 2007 estimates after Iconix reported solid third-quarter 2006 results, closed the acquisition of Mossimo and added Ocean Pacific to their stable of iconic brands. We believe the series of events in the last two days highlights the strength of Iconix's business model: 1) ability to drive strong, highly predictable revenue and premium margins and cash-rich returns; and 2) a solid and aggressive management team that has the operational knowledge and financial strength to quickly complete accretive transactions with material upside."
Despite Beder's bullish assessment of Iconix, investors retreated on the stock after the Ocean Pacific deal. Shares closed down 11.8 percent Wednesday to $16.44.
Cole told analysts that the company expects 2006 full-year earnings per share to be between 70 cents and 73 cents, down from previous guidance of 70 cents to 80 cents, affected partly by the delay of closing the Mossimo deal. For full-year 2007, the company expects EPS of 87 cents to 92 cents.
As for the Op acquisition, Richard Kestenbaum, a partner at investment banking firm Triangle Capital, said, "[Ocean Pacific] was perhaps the first company to pursue the licensing-only model that Iconix has expanded upon and, originally, over 20 years ago, Op was a brand whose brand manager conducted no operations. It is very well suited to the Iconix model and it broadens the spectrum of types of brands and businesses that Iconix runs, and so it is a very good fit."
The role of Dick Baker, Op's ceo, is unclear. Cole said Baker will work with Iconix on the transition and both of them will determine Baker's future as they evaluate where and how they want to position Op including whether parts of the business may be moved to New York from Los Angeles."He stays with us at least through January or February or longer,'' Cole said. "We're talking about a lot of exciting opportunities beyond Op."
With Baker's experience and background, there is the possibility that Iconix might open a West Coast office that he would head, a move that Cole referred to as "Iconix West." Another option is that Iconix and Baker expand the action-sports arena by adding brands, with Baker running that operation in Los Angeles, Cole said.
Baker is on vacation and was unavailable for comment.
Joe Gromek, president and ceo of Warnaco, said that one reason for selling Op was Warnaco's changed focus since it bought the brand in 2004.
"This past year we made a major acquisition in Calvin Klein Jeans in Europe and Asia,'' he said. "The Calvin Klein business positions us in a very different way on a global platform, and we really want to focus our energies in the development of that international platform."
David Conn, executive vice president of Iconix, said during the conference call that Candie's continues growing at Kohl's through comps gains and new store expansion. As for Badgley Mischka, he noted that the bridge-price dress collection launched this spring had $10 million in product sales and that last month's launch in bridal was well received.
Separately, Iconix plans a $200 million stock offering to help repay the indebtedness in connection with the Mossimo and Op purchases. It will include a public offering of $150 million of Iconix common stock and $50 million of Iconix common stock sold by shareholders that will include management as well as previous sellers of brands to Iconix that have received stock as part of their consideration.
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