By Thomas J. Ryan
Iconix Brand Group (Nasdaq:ICON) reported third-quarter earnings that came in ahead of Wall Street estimates; however, the parent of Starter, Danskin and a number of other active and fashion labels reduced its EPS guidance for the year due to higher than expected professional fees associated with its SEC investigation.
The company spent much of last year in conversations with the SEC over its accounting treatment for the formation of international joint ventures. Those conversations led the company to restate its financial statements from 2013 through 2015, and to the departure of its longtime CEO, Neil Cole. In late December 2015, the matter escalated after Iconix received a formal order of investigation from the agency.
On a November 8 conference call with analysts, Iconix President and CEO John Haugh said the company received a letter from the SEC’s staff indicating that its review was over. Said Haugh, “After the tremendous amount of effort our finance and legal teams have expended during this process, we’re very pleased to have this formal closure.”
Net earnings in the third quarter reached $15.2 million, or 27 cents a share, against a loss of $5.4 million, or 11 cents, a year earlier. On an adjusted basis, earnings climbed 114 percent to $11.1 million, or 19 cents a share, exceeding Wall Street’s consensus estimate of 16 cents. The net profit turnaround reflects fewer special charges in the third quarter of this year. The year-ago period also included a large write-off of bad debt in its men’s segment.
Revenues, consisting of royalties from licensing arrangements, reached $90.4 million, up 0.4 percent. In its men’s segment, which includes most of its athletic brands, revenues were down 13.8 percent to $20.2 million.
For Starter, sales are down at Walmart as the discounter shifted to more of its house brands. On the upside, sales for Starter Black Label, its premium lifestyle brand launched in 2012, “accelerated and we are actively developing an upstairs business in major specialty and department stores and exploring additional distribution options for this brand,” Haugh said.
Starter is expected to again trend down in the fourth quarter due to the change at Walmart.
The men’s segment’s decline also reflects ongoing weakness in its men’s fashion brands, Ecko and Rocawear. Ecko, with a new licensee, is expected to return to growth in the fourth quarter. Rocawear continues to be impacted by the sell-off from the former licensee and a new licensee will re-launch the brand for the fall 2017 season. Other labels in its men’s segment include OP, Umbro, Pony, Ed Hardy, Zoo York and Artful Dodger.
Among its other segments, women’s sales were down 12.6 percent to $29.1 million due to the sale of Badgley Mischka in the first quarter this year. Danskin’s contribution also declined due to a lower royalty rate from its exclusive license for basics at Walmart under the Danksin Now label.
Haugh said many of its brands, including Danskin, have a tiered royalty program that starts higher for the first $100 million in sales and eventually adopts a lower rate. In 2008, Iconix re-launched Starter and Danskin at Walmart as an exclusive in the basics category. Candie’s sales also declined due to changes in its contract with Sears. For the fourth quarter, Candie’s will introduce new licensees after pulling back the home and kids categories from Kohl’s. A new intimate sleepwear and hosiery program for Material Girl brand and new footwear collaboration for London Fog will also be introduced in the fourth quarter.
Iconix’s Home segment sales were up 16.4 percent to $11.2 million due to gains at Waverley, Sharper Image and Charisma. In its Entertainment segment, sales jumped 21.5 percent to $30.5 million, driven by continued strength in the Peanuts brand.
Looking ahead, the company expects full-year 2016 revenue to fall short of its previous projections (of between $370 million and $390 million) by between $3 million to $5 million. This reflects delayed timing for some new men’s programs, macro conditions in Europe and some retail resets, officials said.
Earnings are expected to come in 4 cents below its previous guidance range of 93 cents to $1.08 a share to reflect higher than expected professional fees associated with the SEC investigation. Iconix said it is maintaining its 2016 free cash flow guidance of $169 million to $184 million.
Iconix will hold an investor meeting on November 15. With 2016 being a transition year for Iconix, Haugh plans to reveal his first three-year strategic and financial plan since he was brought on a CEO in April 2016. Said Haugh, “With a solid foundation, I believe there is significant opportunity for us to grow both here in the U.S. and internationally.”
Photo courtesy Starter
