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Iconix Brand Group Inc. (ICON)

June 05, 2012 | About:
go_loe

go_loe

1 followers
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:

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue 157 131 30 81 160 217 232 333 370
Net Income -4 -11 16 33 64 70 75 99 126
Shares outstanding 24 25 31 40 57 58 66 72 73
Cash Equivalents 2 3 12 78 53 67 202 122 182
PPE 3 1 1 1 1 7 6 10 11
Intangibles 43 42 172 468 1,038 1,060 1,255 1,401 1,551
Long term debt 29 25 85 141 650 595 569 548 311
Total debt 74 56 116 236 808 807 893 915 972
Cash Flow -10 11 12 32 84 89 119 166 178
FCF 2 3 8 74 48 66 195 119 168


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:

Dimensional Fund Advisors, 4,889,965 6.73
Vanguard Group 4,408,592 6.07
BAMCO Inc 3,900,000 5.37
Burgundy Asset Management Ltd. 3,181,233 4.38
BlackRock Fund Advisors 3,144,461 4.33
Sarbit Advisory Services Inc. 2,177,663 3.05


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.

About the author:

go_loe
I am an investor searching and analyzing investments following value oriented principles.

Rating: 2.6/5 (19 votes)

Comments

ry.zamora
Ry.zamora - 2 years ago
Bro, before I begin, the first thing I want to say is that the company looks like it is worth giving a deeper scan. High margins, growing intangible turnover, and little investments needed for fixed assets.

Unfortunately, your analysis is insufficient. You should've gone into a discussion of the historical financials, or at least some of your findings regarding the company.

For example, everyone knows intangibles is an ephemeral item, and it would be in everyone's best interests -- including yours as you own shares -- if you gave it a closer look. This is because both valuation and the amortization of intangible assets are subjective in nature and can therefore be used as a method of distorting the financial reports.

Another example: efficiency becomes the key to profitability maximization here, even more than net margins themselves when they're so high to begin with. You even mentioned it as one of your cons, and that in itself warrants further analysis that you should've done already by virtue of propounding your idea to the GF community.

A third example. You listed down the major customers ICON is servicing in its business activities. Given that they've been in business for a long, long time, surely you could've tried seeing who their loyal customers are out of these four? Perhaps you could've used that as an indicator of efficiency as well. Think about it. Let's say Walmart was doing business with ICON since 2003 with VERY little variation in either % of sales or absolute dollar values. If that was true, then you can confidently say that the risk of Walmart giving ICON the finger and going to a competitor is low and unlikely to happen barring performance blunders in ICON's part.

Moving down, your valuation method is simple and crude, and it is only useful insofar as screeners are concerned. It does nothing except show me that it is currently trading at a cheap multiple to 2011 FCF, whether EV or Market Cap is used. I would advise at least appraising how the current market price is cheap with respect to ICON's future performance or the market's current expectations. This is made more important by the fact you noted the company has been diluting shareholders year after year.

I'll give you a 2 for effort.
Cornelius Chan
Cornelius Chan - 2 years ago
As well as the above constructive criticism: this stock has been submitted as a value idea contest entry within the last 6 months: see here for the presentation.
Valueseekr
Valueseekr - 2 years ago
I am confused why no one mentions the huge amount spent on acquisitions. With their frequency, shouldn't they be included in a free cash flow analysis? Within that scenario, fcf doesn't look so great...

Am I looking at this wrong?

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