Noting that the majority of the company’s 29 brands “have more mindshare than closet share,” Bob Galvin in his first conference call as president and CEO of Iconix Brand Group Inc. promised to push collaboration among licensing partners in a more unified approach. Unfortunately, a bad debt charge from Sears’ bankruptcy stalled progress in the latest quarter.

The latest quarter included $8.2 million in bad debt expense as a result of the Sears’ bankruptcy filing. The impact of the charge, as well as lost revenues from the Bongo, Joe Boxer and Cannon brands that all have relationships with either Sears or Kmart, led the company to reduce its guidance for the year.

Galvin noted that the company continues to forecast debt covenant compliance. He added, “While the domestic business did not see the progress we had hoped for, our international business continued its profitable growth. We are critically evaluating our operational cost structure to ensure it is aligned with our current level of business and near term plans.”

Net earnings came to $20.2 million, or 20 cents a share, against a whopping loss of $552.7 million, or $9.67, a year ago. Both periods included a number of onetime items, including costs associated with terminating licensees, litigation settlements, impairment charges, gains on sale of trademarks and non-cash gain on investment joint venture. Numerous charges were related to the discovery two years ago of accounting irregularities and an SEC investigation.

On a non-GAAP basis, net earnings tumbled 91 percent to $1.18 million.

The profit decline mainly reflected a hike in SG&A expense by 40 percent to $30.2 million largely due to the bad debt charge. Excluding the Sears’ charge, SG&A expense would have been up 2 percent.

The filing triggered an impairment analysis of all three brands with Sears Holding; Joe Boxer, Cannon and Bongo. The analysis resulted in an impairment charge of approximately $4.4 million on Joe Boxer and no impairment on Cannon or Bongo. All three brands will also undergo an impairment test in the fourth quarter as well.

Revenues, largely from licensing royalties on its DTR deals, were down 13 percent to $46.2 million.

All Iconix’s segments except international continued to face challenges in the period.

In the Womens segment, sales dropped 28 percent to $15.2 million. Adjusted operating income was down 60 percent to $7.6 million. The revenue decline was in line with plans and principally reflected the ongoing transition of Danskin and Ocean Pacific from Walmart’s DTR (direct-to-retail) deals as well as Mossimo from its Target deal.

As previously disclosed, Walmart has said it won’t renew the Danskin Now license subsequent to its expiration in January 2019. Walmart also didn’t renew the Ocean Pacific arrangement that expired in June 2017 and the surf brand is being repositioned to re-connect with the action-sports enthusiast, across the specialty channel. Target didn’t renew its Mossimo license that expired on October 31, 2018.

The Women’s segment also includes Candie’s, Bongo, Rampage, Mudd, London Fog and Material Girl.

In the Mens segment, sales tumbled 36 percent to $7.3 million. Adjusted operating income was down 79 percent to $1.86 million. The revenue decline was mainly impacted by the Buffalo brand and the transition of Starter from a DTR relationship with Walmart to Amazon in fall 2017. This is partially offset by the success coming from Umbro distribution agreement with Target. Jeffrey Wood, CFO, said of Umbro’s Target deal, “Since its launch in February of this year, performance has been strong.”

The men’s segment also includes Rocawear, Zoo York, Ecko Unltd, Artful Dodger, Ed Hardy, Nick Graham, Hydraulic and Pony.

In the Home segment, sales were down 6 percent to $7.06 million. Adjusted operating income gave back 47 percent to $3.6 million. The Home business has been negatively impacted by the terms of the renewal of the Waverly Inspirations contract of Walmart. A DTR deal with Waverly was signed with Christmas Tree Shops with delivery scheduled for early 2019. The segment also includes Cannon, Royal Velvet, Fieldcrest, Charisma and Sharper Image.

Finally, International sales grew 26 percent to $16.7 million. Adjusted operating income rose 49 percent to $9.2 million. The gains were driven by six key brands, anchored by Umbro and Lee Cooper, which have performed strongly in Europe, India and China.

On the call, Galvin, who became CEO on October 15 and was most recently chairman of Cherokee Global Brands, said that while Iconix became the leader in the DTR space in the 2000s, “it is now time for Iconix to adapt to the changes that have taken place in the market in retail space.”

He said will be complete over 50 meetings with iicensing and retail partners and prospective partners  over the next few weeks, including heading to Europe this month.

“My experience in managing global brands is diverse, having been responsible for brand and territory licenses for such brands as Nine West, Fila, Elie Tahari, Jessica Simpson and Vince Komodo in Europe, Asia, South and Latin America, as well as the U.S.,” said Galvin. ”I have determined that successful partnerships at their foundation have strong relationships in a business model that benefits all parties. If either of us or our retail channel partner are not successful none of us will be.”

He said Iconix needs more global brand collaboration among partners while stressing that each of Iconix’s brand “needs to function with one global not local voice,” and look to benefit from broad reach. Said Galvin, “Our best product offerings should not be limited to just one market or one territory, but should be available to each market to reduce cost for everyone and improve sales for the brands.”

Galvin added that while Iconix has faced challenges jumpstarting some brands that were previously in the DTR business model, other options and alternatives will be explored to bring the brands back. He added, “The brands have tremendous consumer awareness and followers, and they now need to be more accessible to those customers. They currently have more mindshare than closet share.”

Finally, Iconix will be “further critically evaluating” the company’s cost structure to make sure it’s aligned with current and expected sales levels and look to further realize synergies that that come from having global scale. Iconix plans to provide a more in-depth update on its turnaround efforts when it releases fourth-quarter results. Said Galvin, “As a company we know we can do better and we are committed to improving our performance for our shareholders, partners and our employees.”

Primarily as a result of the Sears bankruptcy, the company lowered its full-year guidance as follows:

  • Full year revenue guidance lowered to $185 million – $195 million, down from $190 million to $220 million.
  • GAAP net income guidance lowered to a loss of approximately $105 million – $115 million, from $94.4 million to $104.4 million.
  • Full year non-GAAP net income guidance lowered to $5 million – $15 million, down from $20 million to $30 million
  • Full year free cash flow guidance lowered to $40 million – $50 million, down from $50 million to $70 million

Image courtesy Target