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5 Reasons Iconix Still Makes Sense
Last March, I wrote a positive analysis about Iconix Group (Nasdaq:ICON), the licensing company run by Neil Cole, brother of fashion icon Kenneth Cole. At the time, Iconix's stock was trading at $20.55. Since then, it's dropped 61% to below $8. Clearly, the state of the economy hasn't helped, but all is not lost as its fourth quarter results weren't too bad, leading me to believe that now could be a great time to buy its stock. Let's look at my five reasons for believing this:
IN PICTURES: 10 Retirement-Wrecking Moves
No. 1: Mixed, but Positive Earnings
Iconix's fourth quarter revenues increased 14.4% to $54.3 million, while net income decreased 10.9% to $17.1 million. On the surface, it looks like Iconix's earnings growth has ended. However, if you take out the expenses related to the Unzipped litigation ($7.1 million), its operating income actually increased 8.1% ($36.0 million versus $33.3 million). For the entire year, taking out the litigation expenses, it increased operating income 23.5% to $142.9 million from $115.8 in 2007.
Unfortunately, the operating margin in 2008 dropped 640 basis points to 65.9%. However, that compares favorably with another licensing company, Cherokee Inc. (Nasdaq:CHKE), whose nine-month operating margin to November 1, 2008, was 63.5% with revenues dropping 8.5%. Despite this, Iconix's stock dropped 62% in the past 52-weeks compared to Cherokee's slightly lower 50.2% hit. (Find out how to put this important component of equity analysis to work for you in Analyzing Operating Margins.)
No. 2: EBITDA and Market Cap
Iconix's market cap is 3.1-times its trailing 12-month (TTM) EBITDA. This compares favorably with Cherokee, whose market cap is 5.6-times EBITDA (TTM) and Gap (NYSE:GAP) whose market cap is 3.9-times EBITDA (TTM). Given Iconix's enterprise value (see key stats) is $1.09 billion, I'd give it at least an equal value to Cherokee, which gives it a market cap of $828.9 million or $14.22 a share, 66.5% higher than current values.
No. 3: Diversification
In September the company paid $26 million to buy Waverly from its crippled parent, Nexcen Brands (OTC:NEXC). The addition of Waverly to its home fashion brands, which includes Fieldcrest, Royal Velvet and Cannon (bought in 2007), lowers its dependence on its apparel licenses, adding balance to its roster.
No. 4: License Renewal
In January, Iconix announced it would extend its license deal with Target (NYSE:TGT) for its Mossimo brand untilJanuary 31, 2012 , a clear sign the discount retailer remains happy with the brand, almost a decade into the relationship. Given Target's same-store sales in the fourth quarter were down 5.9%, this is a definite vote of confidence from the Dayton-based retailer.
No. 5: International Growth
Also in January, it entered into a 50/50 joint venture with The Falic Group to develop Iconix Latin America. The agreement calls for Iconix to use its partner's Latin American connections as the largest operator of duty-free shops in theAmericas
Bottom Line
Even if it doesn't meet its 2009 guidance of $1.20 to $1.30 a share, I love the diversity of its brands and its margins. As a result, Iconix should do a better job than most surviving the recession relatively intact. And, at this price, I think it's a steal.
Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?
IN PICTURES: 10 Retirement-Wrecking Moves
No. 1: Mixed, but Positive Earnings
Iconix's fourth quarter revenues increased 14.4% to $54.3 million, while net income decreased 10.9% to $17.1 million. On the surface, it looks like Iconix's earnings growth has ended. However, if you take out the expenses related to the Unzipped litigation ($7.1 million), its operating income actually increased 8.1% ($36.0 million versus $33.3 million). For the entire year, taking out the litigation expenses, it increased operating income 23.5% to $142.9 million from $115.8 in 2007.
Unfortunately, the operating margin in 2008 dropped 640 basis points to 65.9%. However, that compares favorably with another licensing company, Cherokee Inc. (Nasdaq:CHKE), whose nine-month operating margin to November 1, 2008, was 63.5% with revenues dropping 8.5%. Despite this, Iconix's stock dropped 62% in the past 52-weeks compared to Cherokee's slightly lower 50.2% hit. (Find out how to put this important component of equity analysis to work for you in Analyzing Operating Margins.)
Iconix's market cap is 3.1-times its trailing 12-month (TTM) EBITDA. This compares favorably with Cherokee, whose market cap is 5.6-times EBITDA (TTM) and Gap (NYSE:GAP) whose market cap is 3.9-times EBITDA (TTM). Given Iconix's enterprise value (see key stats) is $1.09 billion, I'd give it at least an equal value to Cherokee, which gives it a market cap of $828.9 million or $14.22 a share, 66.5% higher than current values.
No. 3: Diversification
In September the company paid $26 million to buy Waverly from its crippled parent, Nexcen Brands (OTC:NEXC). The addition of Waverly to its home fashion brands, which includes Fieldcrest, Royal Velvet and Cannon (bought in 2007), lowers its dependence on its apparel licenses, adding balance to its roster.
No. 4: License Renewal
In January, Iconix announced it would extend its license deal with Target (NYSE:TGT) for its Mossimo brand until
No. 5: International Growth
Also in January, it entered into a 50/50 joint venture with The Falic Group to develop Iconix Latin America. The agreement calls for Iconix to use its partner's Latin American connections as the largest operator of duty-free shops in the
Bottom Line
Even if it doesn't meet its 2009 guidance of $1.20 to $1.30 a share, I love the diversity of its brands and its margins. As a result, Iconix should do a better job than most surviving the recession relatively intact. And, at this price, I think it's a steal.
Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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