Iconix Brand Group, Inc. (NASDAQ:ICON)

6-month top-performing industry here: Dow Jones U.S. Footwear Index
http://bigcharts.marketwatch.com/industry/bigcharts-com/default.asp?timeframe=SixMonth
Close to bottom of Alpha Weighted Shoes And Related Apparel Sector here:
http://www.barchart.com/stocks/sectors/-SHRA?sym=icon
Rated 6 at Moneycentral
Buy the dip.

Iconix (ICON) is a brand management company. Currently, the company owns 18 brands outright: Candie's, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific (OP), Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Ed Hardy, and Waverly. The firm also recently entered an agreement to acquire 100% of the Zoo York brand (currently 51% owned). Additionally, Iconix owns an 80% stake in the Peanuts brand (yes, Snoopy and Charlie Brown - probably its most valuable asset), and 50% stakes in joint ventures controlling Artful Dodger, Ecko, and Material Girl. This extensive portfolio makes Iconix one of the largest pure brand management firms in existence.
This is a compelling business model. Iconix's operations consist of acquiring brands, signing licensees that want to use the brands, coordinating and ensuring a brand image, and handling marketing for the brands. There are no manufacturing operations - manufacturing is done by licensees. This means Iconix has no inventory, extremely low capital requirements, and very little employee overhead. This leads to extreme profitability - the firm's 5 year average operating margin is a lofty 67%, one of the highest I've ever seen! Also, most licensee agreements include minimum royalty stipulations, giving Iconix a near-certain baseline of revenue to plan around.

Consumer brands are durable, versatile assets. Most of them have indefinite useful lives. London Fog has been around over 80 years, Cannon for 113 years, and Danskin is over 126 years old! For many, the brand can be extended to multiple merchandise categories. Candie's, for example, is slapped onto shoes, jeans, purses, and even perfumes. Peanuts has over 1,100 licensees, ranging from the MetLife blimp to filmed entertainment to amusement park rides to clothing.

Iconix' primary external growth driver is going to be acquisition of additional brands. Most of the firm's portfolio has been acquired since 2004. Recently, the company expanded its ownership of Ed Hardy to 100%, from a previous 50% stake. Management has been very clear that the firm will continue to be acquisitive and is always on the lookout for new brands to acquire.

The other growth opportunity is international. The company has established operations in China, Latin America, and Europe, where the primary focus is to take equity stakes in manufacturers in exchange for brand rights.

Iconix has been a successful growth company. Revenues have increased 400% since 2006 - a 35% compound annual growth rate. Operating profits have followed a similar growth track. Recent growth has also been strong, around 20% year-over-year growth in both revenues and profits. The question we have to look at going forward, however, is simple: can these solid financial results continue, and will they translate into higher stock prices?

There are 2 primary risks here. The first is expiration of large licensee agreements. 3 deals with WalMart (WMT) (Danskin, OP, and Starter) account for 21% of sales. The Ocean Pacific deal expired in June, and so far there has been no news of a renewal on it. Both Danskin (2012) and Starter (2013) have relatively near-term expiration dates. A similar situation exists with Target (TGT), which is about 7-10% of sales. The Waverly deal expired early this year with no renewal, and Mossimo's expiration is next year. Without licensees, Iconix' brands don't really have much value.

The second risk is the firm's capital structure. Buying brands requires financing, and Iconix carries over $640 million in debt. Even more concerning is that $287 million in convertible notes comes due next June. Since these notes have a conversion price of about $27.50 a share, and Iconix has a share price under $20, this could set up a big cash payment requirement that will stress the firm's cash reserves. I don't see it as a terminal event by any means, but it is an overhang that will handcuff management in seeking new brand purchases and could lead to increased debt or even equity dilution.

Speaking of dilution, that is another issue I have with this stock. The share count has increased a rapid 10.8% compound annually since 2006, eating about 1/3rd of common shareholder's piece of the profit pie over those 5 years.

Finally, it should be pointed out that Magic Formula Investing (MFI) does not properly penalize firms that grow by expensive acquisitions. Iconix has about $1.6 billion in intangible assets on the balance sheet - that's about 84% of their entire asset base that is thrown out by the MFI method. As a result, Magic Formula return on capital looks good at nearly 60%. However, over the past 5 years, real post-tax returns on invested capital have been been just 7% - not much better than a high yield bond. The stock also trades lower than it did 5 years ago.

In all, Iconix does look undervalued - the share price has certainly trailed growth in profits and cash flows. I believe a reasonable fair value on the stock is around $25. This leads me to put a "positive" rating on the stock, but it is not Top Buy material.

Steve owns no position in any stocks discussed in this article.

Excellent business model. Buy when it has a lower P/E.

High margin, low-risk business trading at a reasonable price - what more could you want? I love the business model. One of the few non-capital-intensive businesses where there are still significant barriers to entry. Instead of high start up costs, potential competitors are kept out because of the long tailed nature of building relationships and reputation. This company's main costs are it's people, and there are certainly no shortage of college-grads out there eager to do great marketing work for lower salaries than the company would have to offer in a better economy. Finally, the business is highly scalable and with managements continued adeptness at acquiring new brands, profitable growth is highly likely.

- Peanuts/Dilbert/Fancy Nancy licensing. Fancy Nancy is really taking off, especially. I'm really surprised there is no TV show yet.
- A nice mix of high fashion (i.e. Badgley Mishka), regular brands (i.e. Starter) and "cool" brands (i.e. Rocawear)
- Good FCF, low PEG
- insiders are buying (up 5%+ in the past six months)

SUCCESS

Great Margins and Revenue growth - price performance this year doesn't seem to reflect. Identified in my YCharts/FinViz double screen.

Cash cow licensing revenue from excellent brands. Good growth prospects, strong balance sheet makes acquisition growth possible also. Management has mismanaged expectations but executing well now. Reasonable P/E. Small cap with room to run.

Good Buy!

Yes!

undervalued

expanding growth, buying new lines

They still carry lots of brands in their portfolio, even after the Rocawear transfer. People still need to buy clothes, and Icon's brands cover a wide spectrum of price points, including selling through Walmart. Wiith the holiday season coming up, sales will rise.

Growth stock will outperform the S&P.

a good apparel stock

As a llicenser of retail brands, gathering more names and staying agressive. Good management.

Solid revenue growth and a great valuation right now.

Walmart has started to use the clothes from Icon. The stock has been beaten down due to the slow down in the economy, but it is now very undervalued. It has the potential to reach &14.50 in 6 months, a 50% gain.

Bottom picking with this one. Based on DCF i belive this stock is undervalued. Risk/reward ratio is good enough for me to take a shot with this one.