1 The Company
Iconix (ICON, Financial) is a simple business. It manages brands. It licenses them to manufacturers and retailers primarily in the apparel and footwear industry. Its brands can be found in JCPenney, KMart, Kohl’s, Sears, Target, etc. A brief history of the company put together with the help of Wikipedia.
No of shares: 75 million
Share price: $14.65 (April 26, 2012)
Market cap: $1.1 billion
Net debt: $433 million
EV: $1.5 billion
FCF: $176 million
EPS: $1.72 (for year 2011)
Ticker: ICON (ICON)
1.1 History
1993 The company began as Candie’s Inc., whose brand it purchased in 1993.
1998 Bongo brand was purchased.
2004 Purchased Badgley Mischka.
2005 Purchased Joe Boxer and Rampage.
2006 Purchased Mudd, London Fog, Mossimo, Ocean Pacific.
2007 Purchased Danskin, Rocawear and Starter from Nike.
2009 Acquired 50% of Marc Ecko Enterprise.
1.2 The Brands
The only brand of the company I know of is Peanuts (the comic strip) which it acquired in partnership with Charles Schulz Associates. Iconix holds 80% of this brand and Schulz owns 20%. Now to think of it, I have also heard of the brand Mossimo, but have never bought anything. In the defense of the company though, it sells mostly in the U.S. and I am in Europe. I will be happy to hear comments from people in the U.S. if they have heard of the brands and how famous they are.
1.3 Business Model
Iconix manages a diversified portfolio of brands with annual global sales of over $12 billion. In a traditional company like say Gap, the company itself designs, manufactures, distributes, retails, advertises, and decides which way the brand will go. Iconix splits these jobs into two parts. It is responsible for advertising, marketing and deciding the trend direction for the brand. It makes money by licensing the brands to companies that do all the legwork, like designing, manufacturing, distributing, warehousing, retailing etc.
This cuts out a lot of risk from the business. The company has no inventory, no operational risk, minimal working capital, and small capital expenditure. Most of the cash that the company generates by licensing deals goes to the free cash flow. The company as you will see spews copious amounts of cash and has a very asset light model. This is one of the best businesses I have seen in a while.
2 Management
The CEO Neil Cole has been on the job since 1993. This was the same year when the company had its IPO. Neil Cole has been instrumental in transforming the company from a manufacturing company to a brand management company. The CEO also owns nearly 4% of the stock.
2.1 Compensation
In 2010, each non-employee member of the board received a cash payment of $50,000 and RSUs of common stocks with fair market value of $100,000. In my opinion the board of directors is not overpaid.
The management generally is another story. But with Iconix, the compensation is not too outrageous. The fact I like is that the management is paid in common stocks and RSUs and not options. This is a good thing in my book as the management gets to have the same performance as the shareholders on the stocks he gets.
2.2 Insider ownership
As I said earlier, 4% of the company is owned by the CEO Neil Cole. The rest of the management owns 1% more.
There is also not so significant institutional holding.Baron Capital owns 5.2%, Black Rock wowns 7.5%, Luxor Capital owns 8.5% and Dimensional Funds holds another 5.2% of the shares.
The figures for the stock ownership have been taken from the annual report of 2011.
3 Operating summary
The company has performed phenomenally. The asset light model and the copious cash it produces has resulted in an enviable performance.
The company follows a growth by acquisition strategy and it is paramount to determine if the are overpaying for the brands they acquire. For this we will look at the RoIC.
The RoIC is not great. On an average the company has managed to eke out a 6% return on the invested capital. This means it might be overpaying for the brands it acquires.
A closer look of the acquisition history gives a better clue. Since 2005, the company has put in $1.5b in new brands and have so far recouped only $1.2b on them. This is an average performance and not great.
The company as expected from the business model has a very high net margin. The company has also been able to retain a significant amount of earnings and reinvest in the growth. The result can be seen. The income has grown at a very satisfying pace and he revenue growth too has not disappointed.
4 Financial Summary
4.1 Current situation
Let us as a warm up look at the current figures from the annual report of 2011. It is hard to gauge what the trademarks are worth. The company also has $311m in debt and is quite manageable. With nearly $182m in cash, I am not too worried about it.
The FCF of the company is bordering on nearly $200m and the net income is around $126m. With $50.7m in interest expense, the interest coverage ratio is around 2.5 and is not very comfortable. I would have liked to see something in the range of 4 or 5.
4.2 Historical developments
The company has been able to increase its cash on hand, year after year. The book value has also increased at a satisfying rate. This although is not very informative as most of the book value is in intangibles.
The net debt has come down with respect to the earning of the company, which is good news. The management clearly is on the right track and sees the need to reduce the debt load of the company. Given the copious FCF, the company will be able to easily pay-off the debt.
5 Shares
The share count of the company has crept up quite a bit since 2002. But the book value per share has also gone up from $1.23 per share in 2003 to $15.25 in 2011.
The company is now trying to reduce the share count by share repurchases. It has authorised $200 million for share repurchases on Oct. 27, 2011. As of Feb. 2012, $29 million worth of stock (1.7m at average price of $16.86) has been purchased. Given that I am quite bullish on the stock, the share repurchase at the moment is going to give the shareholders a tremendous value. The company is cheap and now is the best time to buy shares.
6 Risks
Major risks with the business model are but a few, given that the company has no operations. The two risks I see are as follows.
The company does not design or manufacture the clothes/apparel for its brands. They do not do the quality checking and hence errors from the manufacturers can result in loss of goodwill for brands.
The brands are but a fickle business. Missteps can be very dear indeed. Given that I am not aware of many of the brands, I can not put a price on them. But significant competitions from other brands can lead to loss in sales and impairment of goodwill.
7 Valuation
The company is quite cheap. The company is selling for EV/FCF of around 9 and P/FCF of around 7. With stable cash flow I think the DCF model is the best here and currently the market has a messed up expectation with the stock. The current price means that the market is expecting shrinking FCF. This clearly is a mistake from the information we have so far.
8 Additional disclosure
I am waiting for the market to drag the price of the stock by 10% more. In the first quarter report the company made a weak forecast and the shares dived yesterday by nearly 14%. I feel that the in the near term the company may be dragged down a bit more and I should wait for the pullback to start a position. The company is cheap and it is possible that I may buy around these prices if the situation stabilizes.
Iconix (ICON, Financial) is a simple business. It manages brands. It licenses them to manufacturers and retailers primarily in the apparel and footwear industry. Its brands can be found in JCPenney, KMart, Kohl’s, Sears, Target, etc. A brief history of the company put together with the help of Wikipedia.
No of shares: 75 million
Share price: $14.65 (April 26, 2012)
Market cap: $1.1 billion
Net debt: $433 million
EV: $1.5 billion
FCF: $176 million
EPS: $1.72 (for year 2011)
Ticker: ICON (ICON)
1.1 History
1993 The company began as Candie’s Inc., whose brand it purchased in 1993.
1998 Bongo brand was purchased.
2004 Purchased Badgley Mischka.
2005 Purchased Joe Boxer and Rampage.
2006 Purchased Mudd, London Fog, Mossimo, Ocean Pacific.
2007 Purchased Danskin, Rocawear and Starter from Nike.
2009 Acquired 50% of Marc Ecko Enterprise.
1.2 The Brands
The only brand of the company I know of is Peanuts (the comic strip) which it acquired in partnership with Charles Schulz Associates. Iconix holds 80% of this brand and Schulz owns 20%. Now to think of it, I have also heard of the brand Mossimo, but have never bought anything. In the defense of the company though, it sells mostly in the U.S. and I am in Europe. I will be happy to hear comments from people in the U.S. if they have heard of the brands and how famous they are.
1.3 Business Model
Iconix manages a diversified portfolio of brands with annual global sales of over $12 billion. In a traditional company like say Gap, the company itself designs, manufactures, distributes, retails, advertises, and decides which way the brand will go. Iconix splits these jobs into two parts. It is responsible for advertising, marketing and deciding the trend direction for the brand. It makes money by licensing the brands to companies that do all the legwork, like designing, manufacturing, distributing, warehousing, retailing etc.
This cuts out a lot of risk from the business. The company has no inventory, no operational risk, minimal working capital, and small capital expenditure. Most of the cash that the company generates by licensing deals goes to the free cash flow. The company as you will see spews copious amounts of cash and has a very asset light model. This is one of the best businesses I have seen in a while.
2 Management
The CEO Neil Cole has been on the job since 1993. This was the same year when the company had its IPO. Neil Cole has been instrumental in transforming the company from a manufacturing company to a brand management company. The CEO also owns nearly 4% of the stock.
2.1 Compensation
In 2010, each non-employee member of the board received a cash payment of $50,000 and RSUs of common stocks with fair market value of $100,000. In my opinion the board of directors is not overpaid.
The management generally is another story. But with Iconix, the compensation is not too outrageous. The fact I like is that the management is paid in common stocks and RSUs and not options. This is a good thing in my book as the management gets to have the same performance as the shareholders on the stocks he gets.
2.2 Insider ownership
As I said earlier, 4% of the company is owned by the CEO Neil Cole. The rest of the management owns 1% more.
There is also not so significant institutional holding.Baron Capital owns 5.2%, Black Rock wowns 7.5%, Luxor Capital owns 8.5% and Dimensional Funds holds another 5.2% of the shares.
The figures for the stock ownership have been taken from the annual report of 2011.
3 Operating summary
The company has performed phenomenally. The asset light model and the copious cash it produces has resulted in an enviable performance.
The company follows a growth by acquisition strategy and it is paramount to determine if the are overpaying for the brands they acquire. For this we will look at the RoIC.
| Item | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| RoIC | 0.52 | 12.95 | 7.85 | 6.86 | 5.59 | 5.27 | 6.19 | 7.32 |
The RoIC is not great. On an average the company has managed to eke out a 6% return on the invested capital. This means it might be overpaying for the brands it acquires.
A closer look of the acquisition history gives a better clue. Since 2005, the company has put in $1.5b in new brands and have so far recouped only $1.2b on them. This is an average performance and not great.
The company as expected from the business model has a very high net margin. The company has also been able to retain a significant amount of earnings and reinvest in the growth. The result can be seen. The income has grown at a very satisfying pace and he revenue growth too has not disappointed.
| in $m | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| Net Income | -3.95 | -11 | 15.94 | 32.5 | 63.7 | 70 | 75.11 | 98.85 | 126.11 |
| Revenue | 157 | 131.38 | 30.16 | 80.7 | 160 | 216.76 | 232 | 332.56 | 369.85 |
| Net Margin | -2.52% | -8.63% | 52.87% | 40.28% | 39.85% | 32.36% | 32.37% | 29.72% | 34.10% |
| Retained earnings | -40 | -51.5 | -35.2 | -2.81 | 61 | 131 | 195 | 294 | 420 |
| RE Growth % | -11 | -28.2 | 31.43 | 92 | 2265 | 115 | 49 | 50 | 42.8 |
4 Financial Summary
4.1 Current situation
Let us as a warm up look at the current figures from the annual report of 2011. It is hard to gauge what the trademarks are worth. The company also has $311m in debt and is quite manageable. With nearly $182m in cash, I am not too worried about it.
| Items in $k | Dec 31, 2011 | Dec 31, 2010 |
| Cash | 181,788 | 121,935 |
| Current assets | 284,505 | 225,866 |
| Trademarks and Intang. | 1,550,996 | 1,400,550 |
| Goodwill | 223,269 | 192,780 |
| Total assets | 2,161,303 | 1,951,470 |
| Current liability | 362,783 | 99,960 |
| Income tax liab | 174,238 | 138,577 |
| LT debt | 310,966 | 548,007 |
| Total liability | 867,727 | 812,556 |
| Equity | 1,293,576 | 1,138,914 |
The FCF of the company is bordering on nearly $200m and the net income is around $126m. With $50.7m in interest expense, the interest coverage ratio is around 2.5 and is not very comfortable. I would have liked to see something in the range of 4 or 5.
| Item ($k) | Dec 31, 2011 | Dec 31, 2010 |
| Interest expense | 50,754 | 43,155 |
4.2 Historical developments
The company has been able to increase its cash on hand, year after year. The book value has also increased at a satisfying rate. This although is not very informative as most of the book value is in intangibles.
| Items in $m | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
| Cash | 1.9 | 2.8 | 12 | 78 | 53 | 67 | 202 | 122 | 182 |
| Current Assets | 51.8 | 26 | 22 | 100 | 96 | 130 | 281 | 226 | 285 |
| Total Assets | 103 | 75 | 217 | 701 | 1,340 | 1,420 | 1,800 | 1,950 | 2,161 |
| Current Liabilities | 46 | 31 | 27 | 36 | 76 | 103 | 133 | 100 | 363 |
| Total Liabilities | 74 | 56 | 116 | 236 | 808 | 807 | 893 | 915 | 972 |
| Stockholder' Equity | 29 | 19 | 101 | 465 | 528 | 614 | 909 | 1,040 | 1,190 |
| Current Ratio | 1.13 | 0.83 | 0.84 | 2.80 | 1.25 | 1.26 | 2.12 | 2.26 | 0.78 |
| TL-to-TA | 0.72 | 0.75 | 0.54 | 0.34 | 0.60 | 0.57 | 0.50 | 0.47 | 0.45 |
The net debt has come down with respect to the earning of the company, which is good news. The management clearly is on the right track and sees the need to reduce the debt load of the company. Given the copious FCF, the company will be able to easily pay-off the debt.
5 Shares
The share count of the company has crept up quite a bit since 2002. But the book value per share has also gone up from $1.23 per share in 2003 to $15.25 in 2011.
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| Shares (in M) | 19.65 | 23.68 | 25.18 | 34.77 | 45.27 | 61.43 | 61.25 | 68.33 | 74.71 | 75.50 |
The company is now trying to reduce the share count by share repurchases. It has authorised $200 million for share repurchases on Oct. 27, 2011. As of Feb. 2012, $29 million worth of stock (1.7m at average price of $16.86) has been purchased. Given that I am quite bullish on the stock, the share repurchase at the moment is going to give the shareholders a tremendous value. The company is cheap and now is the best time to buy shares.
6 Risks
Major risks with the business model are but a few, given that the company has no operations. The two risks I see are as follows.
The company does not design or manufacture the clothes/apparel for its brands. They do not do the quality checking and hence errors from the manufacturers can result in loss of goodwill for brands.
The brands are but a fickle business. Missteps can be very dear indeed. Given that I am not aware of many of the brands, I can not put a price on them. But significant competitions from other brands can lead to loss in sales and impairment of goodwill.
7 Valuation
The company is quite cheap. The company is selling for EV/FCF of around 9 and P/FCF of around 7. With stable cash flow I think the DCF model is the best here and currently the market has a messed up expectation with the stock. The current price means that the market is expecting shrinking FCF. This clearly is a mistake from the information we have so far.
8 Additional disclosure
I am waiting for the market to drag the price of the stock by 10% more. In the first quarter report the company made a weak forecast and the shares dived yesterday by nearly 14%. I feel that the in the near term the company may be dragged down a bit more and I should wait for the pullback to start a position. The company is cheap and it is possible that I may buy around these prices if the situation stabilizes.
