Investors essentially sent Iconix Brand Group Inc. a vote of no confidence by selling shares of the stock, which fell 57.3 percent Friday to close at $6.90.
Shares of Iconix hit a 52-week low of $6.60 in intraday trading, with 23.1 million shares changing hands, compared with a three-month average volume of 1.3 million shares.
Investors were reacting in part to the company’s news late Thursday that it will restate certain financial statements. As Wunderlich Securities analyst Eric Beder noted, the announcement pertained to “some relatively minor income statement restatements.” But what could have worried some investors was the company’s statement in a regulatory filing with the Securities and Exchange Commission that there is the potential for asset impairment charges. The company said the potential write-downs are for the men’s fashion brands in its portfolio. And with the company also lowering guidance for the second half — revenues down to $370 million from $380 million and EPS falling to a range of $1.35 to $1.40 from $2.00 to $2.15 — Beder said “visibility in 2016 is virtually non-existent.”
Iconix also said that the SEC comment letter, which it has said pertains to how it accounted for certain transactions, remains unresolved.
While Iconix seems to have been able to maintain the value of its intellectual property even in the face of declines in organic revenue growth, given the possible write-downs for the men’s fashion brands, Beder concluded, “We believe a material review of the company’s entire brand portfolio is overdue.”
Cowen & Co.’s John Kernan also expressed growing concerns over Iconix’s business model.
“An extremely leveraged and complex capital and organizational structure needs to be simplified in our view…. [T]he organic business of several of these brands is declining at such a significant rate that some of these brands are worth less than what they were purchased for. We estimate that Iconix’s minimum guaranteed royalty income in fiscal year 2015 is approximately $250 million,” Kernan said.
Cowen’s analyst concluded: “We are growing incrementally more nervous about Iconix’s ability to refinance its [convertible] coming due in 2016 following its most recent earnings warning. After stress-testing the model we still can see $75 million to $100 million in free cash flow in fiscal year 2016, but the organic business is declining at a rapid rate. There is intellectual property in the portfolio that can be sold to offset liquidity issues.”
While potential buyers of some of the IP assets have been keeping tabs on the situation at Iconix, some buyers and advisers in the mergers and acquisitions sector are saying there probably won’t be any action until after a resolution of the SEC matter. To be sure, buyers are waiting to see if there will be a negative outcome, which could allow them to snap up an asset at a fire sale.
Beder, in his research note Friday noted that not all brand licensing firms are like Iconix, with a few publicly traded companies learning from Iconix’s mistakes. Namely, no international joint ventures; no aggressive purchasing of mature brands; lower debt levels, and solid organic growth prospects, the analyst said. He added that based on his projections, Iconix “has registered organic revenue growth only once in the last 14 quarters.”
Beder offered investors three alternative investments to Iconix. One is Cherokee, which the analyst said is poised to begin announcing new deals to replace the one it has with Target that is set to expire in January 2017. Another is Sequential Brands Group, a company whose team members — its chief executive officer and chief financial officer — are both former Iconix executives and “understand the traps of the brand licensing model that Iconix has fallen into.” Beder saw upside drivers from Sequential’s acquisition of the Martha Stewart brand and the beginning of an international push for some of its brands. The other company Beder was partial to is Xcel Brand, citing key relationships with QVC and Hudson’s Bay Corp.