When you see the word "licensing", what is the first thing that comes to mind? I would guess most people immediately think of the National Football League and team apparel worn by millions of Americans. In a nutshell, an apparel or footwear company pays another for the right to use a particular brand name. Some make licensing a serious part of their business model and others just dabble. I'll examine who is doing what and how these activities help pay some of the bills.

IN PICTURES: Eight Ways To Survive A Market Downturn

The Pure Play
Without question, the leader in brand licensing is Iconix Brand Group (Nasdaq:ICON), marketer of Joe Boxer, Ocean Pacific, Candie's, London Fog and many others. I've written articles in March 2008 and February 2009 highlighting the many reasons its business model makes sense, and investors are starting to take notice. Its stock was down in the $8 range when my latest article appeared and now sits comfortably above $15, having recently announced relatively strong first-quarter earnings. The company is so confident about 2009 that it raised its full-year revenue guidance from the $210 million to $220 million range to $218 million to $225 million, with earnings per share between $1.16 and $1.21. That's a net margin of over 30%. What's not to like?

Money Out
What companies are paying out big dollars in the licensing and royalties game? One of the biggest is Nike (NYSE:NKE), which has athlete and team endorsement contracts to pay out in the next five years worth a minimum (it could be more depending on actual sales, etc.) $2.7 billion. Given 2008 sales of $18.63 billion and an unusually large payment of $700.4 million this past fiscal year, endorsement contracts represent just 3.8% of sales. While I have no data to back up my assertion, I'm assuming Tiger Woods is worth every penny. Technically, I would think endorsement deals are contracted services rather than licensing/royalty agreements. Nonetheless, they usually are for the sole purpose of increasing revenues. Call them what you will, endorsement deals work.

Do you remember Michael Phelps' cool swimsuit at the Beijing Olympics? It was a Speedo, part of New York-based apparel company Warnaco (NYSE:WRC). In addition to Speedo, it holds the North and South American manufacturing and marketing rights for intimate apparel and jeanswear under the Calvin Klein name. The two product lines generate 73% of its revenue. It will pay out a minimum of $293.7 million in royalties over the next five years for the right to use the brand name. In 2008, its minimum guaranteed royalty payment was $50.9 million, 2.5% of its total revenues ($2.06 billion) and 3.4% of its Calvin Klein sales. I'd say it's a fair trade to spend $3.90 for the chance to make $100, wouldn't you?

Money In
Any licensing arrangement involves two parties. In the case of Warnaco, the company granting the use of the Calvin Klein name is New York-based Phillips-Van Heusen (NYSE:PVH). In addition to Calvin Klein, it owns Izod, Arrow and G.H. Bass. While the three are definitely heritage brands, Calvin Klein is the difference maker with more than 50 wholesale licensing arrangements generating $331.2 million in licensing revenues in 2008, or 13.3% of overall sales. Two licensees, Warnaco and Coty (fragrances), were responsible for $185.5 million in licensing revenue. While the company has struggled in recent quarters, it should rebound in the coming months and quarters once the economy improves.

Finally, we have the dean of fashion, Polo Ralph Lauren (NYSE:RL). While its licensing revenues have fallen in the past year due to acquiring key licensees, it is still a very important and profitable segment of the business. In fiscal 2008, it generated $96.7 million in operating income from $209.4 million in licensing revenue. That's an operating margin of 46.2%. Its two biggest licensees are WestPoint Home and Peerless, which represent 16% of its total licensing revenue. It might be a small piece of the pie, but it's a profitable one. Perhaps Ralph should spin off its licensing segment so it could compete with Iconix. That would be a battle.

Bottom Line
The five companies mentioned here are all using licensing and/or royalties to help supplement their income to pay some bills. Frankly, I don't know why more companies aren't doing the same.

Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!