Shares of Iconix Brand Group fell another 2.3 percent Friday, a day after company executives described a federal agency matter a “review,” and not an investigation.
Interim chief executive officer Peter Cuneo emphasized to investors Thursday at a conference hosted by C.L. King that discussions between the Securities and Exchange Commission and the company are a “review.”
C.L. King analyst Steven Marotta said the company — chief financial officer David Jones was also presenting — also noted that the “outcome hinges solely on the accrual accounting of previously formed joint ventures and not on the underlying fundamentals — or cash flow — of the business.” Iconix last month disclosed the focus of the SEC review, when it reported second-quarter results. The indications are that the matter could be concluded before the end of the year, if not sooner, Marotta said.
The company executives also noted a second near-term priority, which is to secure financing for the $300 million convertible notes due June 2016.
Marotta said: “Given cash on hand and expected cash flows over the next three to four quarters, combined with unfettered brands available for securitization, we believe the notes will be satisfactorily retired with no liquidity issues. We also believe the SEC review will likely be completed before the notes are properly satisfied.”
During the meeting, company executives also said that fiscal-year 2015 free-cash-flow assumptions were lowered because of the potential push out of the “Peanuts” movie in China to fiscal-year 2016. And based on recent conversations with the studio, a November release is now more likely.
While company executives said their preference is to stabilize the brands, they didn’t rule out the possibility that some divestitures may have to be considered.
Marotta said during his first “face-to-face meeting” with Cuneo and Jones, given their priorities and solutions, “looking out over the next six to 12 months, we see the putting to bed of bad news acting as a positive catalyst for the stock.”
The analyst noted that there are some risks ahead for the company, most notably that disruptions in the credit markets, or higher interest rates, could cause future acquisitions by Iconix to be more expensive and potentially more difficult to finance.
And while Marotta said the loss of any of Iconix’s main direct-to-retail partners would result in outsized revenue decreases, he didn’t foresee it as an immediate-term risk.
Shares of Iconix closed at $12.65, near its 52-week low of $11.32.
The company said last month that founder and longtime chairman and chief executive officer Neil Cole was to step down, although he is helping with the management team transition through Sept. 30. He was the third c-level executive to leave the company in just a matter of a few months. In March, chief financial officer Jeff Lupinacci left the company, and he was followed by the departure of chief operating officer Seth Horowitz a month later. All the departures are unrelated to each other.
Sources said the SEC matter likely began in late March or early April. The discussions are part of what Iconix referred to as an “ongoing periodic review” of its annual report, or Form 10-K, for the year ended Dec. 31. Specifically, the issue is the recognition of gains from the formation of joint ventures — $46.5 million in 2014, $24.6 million in 2013 and $5.6 million in 2012 — and whether they should have been consolidated. If the SEC’s conclusion is yes, the gains will have to be reversed and treated as noncontrolling interests.
Last month when it posted second-quarter results, the company reset its guidance for the full year, with licensing revenue to achieve low-single-digit growth in the range of $410 million to $425 million. Earlier 2015 projections, from April, were estimated in the range of $490 million to $510 million.
There are also some shareholder lawsuits alleging securities law violations against the company and former executives. The allegations still have to be proven in court.