Iconix Brand Group Inc. on Wednesday reported revenue for the fourth quarter of $42.7 million, down 18 percent from the year-ago period and negatively impacted, in part, by the Sears bankruptcy. The company, whose brands include Starter and Umbro, also reported a Q4 operating loss of $52.1 million, as compared to an operating loss of $18.3 million in Q4 2017.

Bob Galvin, CEO commented, “We have finalized our review of the business and operational goals and objectives and we have put our plan into effect. As a result, we have reduced our operating cost structure by approximately $30 million to align with our plan. On the business front, the quarter was negatively impacted by the Sears bankruptcy, while our international business continued to demonstrate strong growth. We continue to build the pipeline of our future business, as we have signed 83 deals over the last six months for aggregate guaranteed minimum royalties of approximately $45 million through the life of the agreements for the next several years.”

Fourth Quarter and Full Year 2018 Financial Results

For the fourth quarter of 2018, total revenue was $42.7 million, an 18 percent decline as compared to $52.3 million in the prior year quarter. 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. Such decline was expected, principally as a result of the transition of our Danskin, OP and Mossimo direct to retail licenses in our women’s segment, as previously announced. Iconix’s revenue for the fourth quarter of 2018 and the full year 2018 were also impacted by the effect of the Sears bankruptcy on our 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 although the men’s segment declined 2 percent for 2018 mostly as a result of the transition of the Starter brand from Walmart to Amazon. Iconix’s International segment grew for both the quarter and the year primarily based on the performance of our brands in China, Europe and India.

In the first quarter of 2018, the company adopted a new revenue recognition accounting standard (ASU No. 2014-09 Revenue from Contracts with Customers – Topic 606). Adoption of this standard increased the fourth quarter of 2018 revenue by approximately $2.3 million and increased revenue for the full year 2018 by approximately $3.9 million.

SG&A Expenses

Total SG&A expenses in the fourth quarter of 2018 were $29 million, a 29 percent decrease compared to $40.9 million in the fourth quarter of 2017. Most of the decline for the quarter was a decrease in compensation, advertising and professional expenses.

Total SG&A expenses in the full year 2018 were $121.4 million, a 6 percent increase compared to $114.6 million in the full year 2017. Included in these expenses was an $8.2 million bad debt expense as a result of the Sears bankruptcy filing. Excluding the bad debt expense related to the Sears bankruptcy, SG&A expenses decreased 1 percent year over year.

Trademark, Goodwill, and Investment Impairment

In the fourth quarter of 2018, the company recorded a non-cash trademark impairment charge of $58.7 million, primarily in the women’s segment related to the write-down in the Mossimo, Joe Boxer and Mudd trademarks, to reduce various trademarks in those segments to fair value. The company also recorded a non-cash investment impairment charge of $2.5 million in the fourth quarter of 2018 due to impairment of the company’s investment in iBrands.

For the full year 2018, the company recorded a non-cash trademark impairment charge of $136.4 million primarily in the women’s segment, which was primarily related to the Mossimo, Joe Boxer and Mudd brands. The company also recorded a non-cash goodwill impairment charge of $37.8 million in the full year 2018 due to impairment of goodwill in the women’s segment.

Operating Income and Adjusted EBITDA

Operating loss for the fourth quarter of 2018 was $52.1 million, as compared to operating loss of $18.3 million in the fourth quarter of 2017. Adjusted EBITDA in the fourth quarter of 2018 was $11.9 million which represents an operating loss of $52.1 million excluding trademark and investment impairments of $61.2 million and other net charges of $2.8 million. Adjusted EBITDA in the fourth quarter of 2017 was $18.9 million which represents an operating loss of $18.3 million excluding trademark and investment impairments of $28.5 million and other net charges of $8.7 million. Refer to footnote 1 below for a full detailed reconciliation of operating loss to adjusted EBITDA. The change period over period is primarily as a result of the change in revenue as is outlined above.

Operating loss for the full year 2018 was $119 million, as compared to operating loss of $564.7 million in the full year 2017. Adjusted EBITDA in the full year 2018 was $74.6 million which represents an operating loss of $119 million excluding goodwill, trademark and investment impairments of $176.7 million and other net charges of $16.9 million. Adjusted EBITDA in the full year 2017 was $117.7 million which represents an operating loss of $564.7 million excluding goodwill, trademark and investment impairments of $654 million and other net charges of $28.3 million. Refer to footnote 1 below for a full detailed reconciliation of operating loss to adjusted EBITDA. The change year over year is primarily as a result of the change in revenue as is outlined above.

Interest Expense, Other Income, and Loss on Extinguishment of Debt

Interest expense in the fourth quarter of 2018 was $14.9 million, as compared to interest expense of $21.8 million in the fourth quarter of 2017. In the fourth quarter of 2018, the company recognized a $7.2 million gain resulting from the company’s accounting for the 5.75 percent Convertible Notes which requires recording the fair value of this debt at the end of each period with any change from the prior period accounted for as other income or loss in the current period’s income statement.

Interest expense in the full year 2018 was $59.2 million, as compared to interest expense of $67.9 million in the full year 2017. In the full year 2018, the company recognized a $81 million gain resulting from the company’s accounting for the 5.75 percent Convertible Notes which requires recording the fair value of this debt at the end of each period with any change from the prior period accounting for as other income or loss in the current period’s income statement. Additionally, in the full year 2018, the company acquired an additional 5 percent interest in its Iconix Australia joint venture and as a result, recognized a $8.4 million pre-tax non-cash gain on the remeasurement of the company’s initial investment. In the full year 2018, the company recognized a $1 million gain, as compared to a gain of $2.7 million in the full year 2017, each related to payments received from the sale of its minority interest in Complex Media in 2016.

In the full year 2018, the company recognized a gain on extinguishment of debt of $4.5 million related to the early extinguishment of a portion of the company’s 1.50 percent Convertible Notes due 2018 as compared to a loss of $20.9 million in the full year 2017 related to the early extinguishment of a portion of the company’s term loan and the repurchase of a portion of the company’s 1.50 percent Convertible Notes due 2018.

Provision For Income Taxes

The effective income tax rate for the fourth quarter of 2018 is approximately -11.1 percent which resulted in a $6.7 million income tax provision, as compared to an effective income tax rate of 165.5 percent in the prior year quarter which resulted in a $66.8 million income tax benefit. The effective income tax rate for the full year 2018 is approximately -7.9 percent which resulted in a $6.5 million income tax provision, as compared to an effective income tax rate for the full year 2017 of 14.7 percent which resulted in a $96 million income tax benefit.

The decrease in the effective tax rate for both the fourth quarter and the full year is primarily a result of foreign tax expense calculated in local jurisdictions where there are no net operating losses available to offset the current tax liabilities, partially offset by a tax benefit resulting from the tax impact of impairment expenses recorded on indefinite lived intangible assets.

GAAP Net Income and GAAP Diluted EPS

GAAP net loss from continuing operations attributable to Iconix for the fourth quarter of 2018 reflects a loss of $69.1 million as compared to income of $24.7 million for the fourth quarter of 2017. GAAP diluted EPS from continuing operations for the fourth quarter of 2018 reflects a loss of $9.75 as compared to income of $3.97 for the fourth quarter of 2017.

GAAP net loss from continuing operations attributable to Iconix for the full year 2018 reflects a loss of $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.

Reverse Stock Split – On March 14, 2019, the company effected a 1-for-10 reverse stock split (the “Reverse Stock Split”) of its common stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise would have been entitled to receive fractional shares of common stock had their holdings rounded up to the next whole share. All share and per share amounts in this press release have been adjusted to reflect the Reverse Stock Split.

2019 Guidance

  • Full year revenue guidance of $145 million – $160 million.
  • GAAP operating income guidance of $73 million – $83 million.
  • Full year adjusted EBITDA guidance of approximately $70 million – $80 million.

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 as discussed above. Such periodic adjustments to fair value cannot be estimated in advance and thus are not taken into account in guidance.

Adjusted EBITDA

Adjusted EBITDA for the fourth quarter of 2018 was $11.9 million as compared to $18.9 million for the fourth quarter of 2017. Adjusted EBITDA for the full year 2018 was $74.6 million as compared to $117.7 million for the full year 2017.

Photo courtesy Iconix Brand Group