EXEC: Authentic Solidifies Position as No. 2 Global Licensor as Company Heads Toward IPO

The ratings agency went on to say that Authentic is relatively immune to the near-term pressures facing most of its peers.

“By generating much of its revenue and EBITDA from guaranteed minimum royalty payments, ABG has limited near-term exposure to fashion risk, consumer demand, inflation, tariffs, or currency fluctuations,” S&P noted. “The company’s 2,100+ licenses are most commonly three-, five-, seven-, or 10-year terms, the majority are paid quarterly in advance, and nearly all are paid in U.S. dollars. Historically, the licenses have been renewed at rates well over 90 percent.”

Given the company’s broad network of licensing partners, it has been able to transfer licenses relatively quickly when its operating partners have encountered financial distress. 

“The company generally acquires underperforming mid-tier and accessible luxury brands. During their history, they have experienced several failures among their operating partners, including Saks, Liberated Brands, and Global Brands Group (GBG). The company’s legal arrangements have insulated it from these failures, while also preventing it from accruing significant litigation expenses. While ABG has assumed minority interests in some operating companies, such as Catalyst Brands (formerly the SPARC Group), we consider these immaterial to its creditworthiness.”

“We expect ABG will sustain or grow its leadership position over the next few years. This is despite intensifying competition in the brand management industry. We believe the company’s three largest brands collectively account for more global retail sales equivalent than the entire portfolio of any of its brand management peers. While we believe scale doesn’t provide a direct competitive advantage, ABG’s portfolio of brands allows it to cross-promote and distribute multiple brands through common channels. ABG’s geographic reach and broad licensing partner networks provide better differentiation, as does the company’s reputation for effectively managing celebrity brands and joint ventures. This has helped it recently secure control of Guess’s and Kevin Hart’s IPs while their founders retained 49 percent of noncontrolling stakes. We believe the company is well-positioned for continued growth as apparel companies continue to divest underperforming brands. 

“We believe ABG’s business has meaningfully diversified in recent years. In its 2021 S-1 filing, it disclosed that GBG accounted for about 14 percent of its revenues. Following GBG’s bankruptcy filing and liquidation, ABG has significantly improved its licensing partner for diversification. Today, no licensee contributes over 4.5 percent of ABG’s revenue, and only eight contribute 2 percent or more. ABG’s geographic diversification also enhances most of its acquisitions, as it secures about 33 percent of its revenue from outside of the U.S. and Canada.”

The agency said that, despite Authentic’s brands being slightly more concentrated—the Top 10 brands accounting for 61 percent of pro forma revenues—no single brand contributes more than 20 percent of revenue. Only two brands account for more than 10 percent, and four brands account for more than 5 percent of revenue, according to S&P research.

“Various factors constrain the ratings, including the company’s financial sponsor ownership, limited barriers to competition, and limited control over and dependence on operating partners for license renewals across an increasingly large and diverse set of mature brands. Brand management companies are becoming increasingly aggressive. For example, WHP recently announced the acquisitions of Lands’ End and Marc Jacobs; Marquee recently announced the acquisition of Roberto Cavalli; and BlueStar recently closed on the acquisition of Dickies.

Still, S&P also said there are limits to how much retail sales those companies can capture, “particularly within the mid-tier category that ABG primarily focuses on [currently].”

The agency said expanding its focus on luxury or acquiring value brands could yield weaker returns on future acquisitions.

“With strong financial backers of their own, we see material risks that competitors could pressure ABG to overpay for acquisitions, reducing its potential returns and slowing its growth.

S&P also highlighted the recent shift in the corner office at Authentic Brands Group, Inc. – particularly with the transitions of Jamie Salter to executive chairman and Matt Maddox to CEO – as well as an IPO publicly targeted within 12 months and a record of increasingly large acquisitions, the agency said it sees risks that the company’s historically disciplined approach to dealmaking could weaken over the next few years in the face of pressures from the quarterly earnings cycle and broader investor scrutiny.”

S&P also said its ratings are limited by Authentic’s dependence on licensees for its revenues.

“While ABG’s contractual right to transfer IP to a new operating partner limits the downside exposure of any individual license, we view the company’s exposure to the effects of a prolonged economic downturn as comparable to that of broader apparel and entertainment market participants. Without much information on the counterparty risk of its 1,700-plus licensees, we see risks that, in such an environment, distress among its operating partners could be highly correlated,” S&P wrote.

“The stable outlook reflects our expectation that ABG will continue to generate revenue growth while maintaining EBITDA margins in the high-70 percent area and generally sustaining leverage of about 4x or less,” the agency concluded.

Authentic recently said its portfolio includes over 50 brands, generating roughly $38 billion in annual system-wide retail sales. Its roster includes Reebok, Champion, Shaquille O’Neal, David Beckham, Kevin Hart, Sports Illustrated, Elvis Presley, Muhammad Ali, Marilyn Monroe, Guess?, Aéropostale, Nautica, Eddie Bauer, Lucky Brand, Nine West, Brooks Brothers, Juicy Couture, Vince Camuto, Izod, Van Heusen, Dockers, Ted Baker, Hart Schaffner Marx, Vince, Barneys New York, Judith Leiber, Quiksilver, Spyder, Billabong, Volcom, Roxy, RVCA, DC Shoes, Prince, Sperry and Hunter.

Image courtesy Authentic Brands Group, LLC