Iconix Brand Group Inc. (ICON)

Buiness profile: Iconix Brand Group Inc. owns, licenses and markets a growing portfolio of consumer brands including CANDIE'S (R), BONGO (R), BADGLEY MISCHKA (R), JOE BOXER (R), RAMPAGE (R), MUDD (R), LONDON FOG (R), MOSSIMO (R), OCEAN PACIFIC (R), OP (R), DANSKIN (R), DANSKIN NOW (R) ROCAWEAR (R), CANNON (R), ROYAL VELVET (R), FIELDCREST (R), CHARISMA (R), STARTER (R), WAVERLY (R), ZOO YORK (R) and SHARPER IMAGE (R). In addition, Iconix owns interest in the ARTFUL DODGER (R), ED HARDY (R), ECKO (R), MARC ECKO (R), MATERIAL GIRL (TM), TRUTH OR DARE (TM) and PEANUTS (R) brands.


The company licenses its brands to a network of leading retailers and manufacturers that touch every major segment of retail distribution from the luxury market to the mass market in both the U.S. and worldwide. Through its in-house business development, merchandising, advertising and public relations departments Iconix manages its brands to drive greater consumer awareness and equity. Recently, Iconix announced the completion of the formation of their joint venture company in India, Iconix India with Reliance Brands Limited.


Also, currently they have similar partnerships in China, Europe and Latin America. There is about $12 billion in collective revenues using their brands.


Selected historical financials:





Management:


Management led by the founder Neil Cole have shown their skills in acquiring brands, and developing and marketing well. Free cash flow is used to acquire more brands and growing profitably. Mr. Cole owns about 1.5 million shares.


Major Customers:


Retail:


Walmart (17%)


Target (7%)


Kohl’s (6%)


Kmart/Sears (5%)


Wholesale:


Li & Fung USA and affiliate licenses (10%)


Large customer reliance and dependability has been decreasing for years. For example Walmart accounted for 17%, 21% and 23% of the company’s revenue for the years ended Dec. 31, 2011, Dec. 31, 2010 and Dec. 31, 2009, respectively.


Valuation:


It is an asset light business that has ample liquidity to conduct day-to-day operations. The stock sells for less than 10 times free cash flow to the enterprise value and 6 times free cash flow to market cap. For 2012, they are expecting around $180 million in free cash flow. This is not including recent ventures and growth opportunities in developing markets like in India. Net tangible assets (PPE) they own to produce the sales today are $11 million.


Market cap – $1.1B

FCF – $180M

EV – $1.7B

EV/FCF ~10

Market cap/FCF ~6

Debt – $600M

Long term Interest – $21M

No Defined Benefits plan


Major shareholders:





Pros:


Ø There is no need of reinvestment in PPE due to the nature of the asset-light business.

Ø The founder-owner is running the business.

Ø Recent partnerships in emerging markets add fuel to growth.

Ø Shares are selling cheaply relative to current and future earnings/potential of the business.


Cons:


Ø Shares outstanding have been increasing at a high rate, some due to options issuance.

Ø Low operational involvement/control in product development can lead to poor quality/image of brands.

Ø Losing one or more major customers like Walmart or Target can be major setback in domestic markets.


Disclosure: I own shares of this company.