By Eric Smith
After enduring the loss of some licensing agreements, the departure of key executives and the bankruptcy of a key customer, Iconix Brand Group, parent of Starter and Umbro, is happy to put last year behind it, according to CEO Bob Galvin, who called 2018 “challenging and transitional.”
Speaking on Wednesday morning’s earnings conference call with analysts, Galvin began by listing the myriad obstacles that threatened to derail Iconix in 2018.
“We saw a determination of a number of DTRs (direct-to-retail), including the wrap-up of Mossimo, Danskin and Royal Velvet,” Galvin said. “We experienced the Sears bankruptcy, an impact to our Bongo, Cannon and Joe Boxer businesses. We also experienced the departure of a number of executives, planned and unplanned. I joined the company in mid-October of 2018, and our new CFO, John McLean, joined in February 2019. With all of this, the company and its people have remained optimistic and focused on the task at hand of cleaning historical issues and building for the future.”
Optimism might remain, but the company has to work through some challenges that became evident with Wednesday’s earnings report and how Wall Street reacted.
Shares of Iconix fell 27 cents, or 13.6 percent, to $1.71 at market close. Earlier in the day, Iconix reported revenue for the fourth quarter of $42.7 million, down 18 percent from the year-ago period and missing Wall Street targets by $2 million. For the full year 2018, total revenue was $187.7 million, a 17 percent decline as compared to $225.8 million in the full year 2017.
The company expected that decline, primarily because of the transition of its Danskin, OP and Mossimo direct-to-retail licenses in its women’s segment, all which were previously announced.
Iconix’s revenue for the fourth quarter of 2018 and the full year 2018 was also impacted by the effect of the Sears bankruptcy on its Joe Boxer & Bongo brands in women’s and the Cannon brand in Home.
Iconix’s men’s segment revenue increased 38 percent in the fourth quarter of 2018 as compared to the prior year quarter primarily from the Umbro, Ecko and Buffalo brands, though the men’s segment declined 2 percent for 2018 mostly as a result of the transition of the Starter brand from Walmart to Amazon.
Looking at income, the company reported a GAAP net loss from continuing operations attributable to Iconix for Q4 of $69.1 million, as compared to a profit of $24.7 million for Q4 2017. GAAP diluted EPS from continuing operations for Q4 reflects a loss of $9.75 as compared to income of $3.97 for the fourth quarter of 2017. Q4 operating loss was $52.1 million, as compared to an operating loss of $18.3 million in Q4 2017.
Iconix’s GAAP net loss from continuing operations for the full-year 2018 was $100.5 million, as compared to a loss of $535.3 million for the full-year 2017. GAAP diluted EPS from continuing operations for the full-year 2018 reflects a loss of $15.73 as compared to a loss of $94.71 for the full year 2017. Operating loss for the full year 2018 was $119 million, as compared to operating loss of $564.7 million in the full year 2017.
The Sears bankruptcy was perhaps the biggest headwind for Iconix last year. The company’s home segment was down 34 percent for the quarter and down 15 percent for the year, with the Q4 decline was principally impacted the Sears bankruptcy on its Cannon brand.
There were some positives in the earnings report, however, Galvin noted.
“We will be receiving a clean opinion from our auditors for the 2018 audit,” he said. “We are in compliance with our various debt agreements as of December 31, 2018, and forecast continued compliance through 2021. We have significantly reduced our SG&A with extensive cost reductions and expense management. We are signing new deals for former DTR brands and are having ongoing negotiations for certain categories for these brands.”
The company instituted changes that it expects will reduce SG&A by approximately $40 million for Fiscal 2019 compared to SG&A in 2018. Reductions are in the areas of personnel and related costs, professional fees, receivables management and other expense management, Galvin said.
Specifically, Iconix reduced headcount from 24 vice presidents to 18, and total employees from about 156 to 122. In the U.S., the company reduced headcount from 81 to 53.
“My direct reports have increased during this time, which allows me to stay on top of the business and to be more involved in the day-to-day operations,” Galvin said. “The results have been an increase in global collaboration by various brand managers across all segments and territories as they are now interacting with their peers in other parts of the world.”
Since last October, Iconix renewed or entered into more than 80 licensing deals across the globe, totaling $45 million during the life of the agreements.
Also, the company announced that it plans to launch a Starter footwear brand later this year.
Iconix’s full-year revenue guidance is $145 million to $160 million, while GAAP operating income guidance is $73 million to $83 million and full-year adjusted EBITDA guidance is approximately $70 million to $80 million.
The company said GAAP net income will be affected by non-cash adjustments to the then-current fair value of the company’s 5.75 percent convertible notes.
Galvin said the company is confident in its current portfolio’s ability to “stabilize” the business and turn things around in 2019.
“Turning to the past five months, we have made progress critically analyzing the business model and restructuring a number of areas and practices. Our goals coming into 2019 were to stabilize the business and create a foundation for growth in 2020 and beyond. While Iconix has grown in the past via acquisitions, that will not be our focus for the foreseeable future. We have a portfolio of almost 30 brands that are still in the process of being harvested and we will keep us busy while we maximize their potential.
Photo courtesy Iconix Brand Group