Starter A Bright Spot For Iconix Brand Group

By Thomas J. Ryan

<span style="color: #a8a7a7;">Iconix Brand Group said cost-control efforts led to improved operating profits in the first quarter. Sales fell sharply due to the loss of direct-to-retail (DTR) agreements—including Danskin at Wal-Mart—but Starter delivered healthy gains.

In the quarter ended September 30, the net loss came to $35.7 million, or $3.07 a share, against a profit of $20.2 million, or $2.81, a year ago.

On a reported basis, the operating loss was $8.1 million against a profit of $12.1 million a year ago. Overall net charges were $29.0 million in the period, including a $17 million impairment charge related to its investment in Marcy Media.

Excluding those charges, as well as $4.0 million in non-recurring charges in the year-ago period, adjusted EBITDA improved 29.8 percent to $20.9 million from $16.1 million a year ago. The adjusted EBITDA margin improved to 59 percent from 35 percent last year.

On a conference call with analysts, Bob Galvin, president and CEO, said third-quarter results were in line with internal expectations and guidance. He said, “Our cost savings, that we put in place at the end of 2018, continued to pay dividends.”

Expenses have been reduced by $32 million, or 34 percent, year-to-date.

In the third quarter, SG&A expenses declined 12.9 percent to $26.3 million from $30.2 million. Most of the decline was due to decreased advertising costs, professional and consulting fees, bad debts that offset costs related to a potential SEC settlement, and the impairment of licensing contract assets.

On an adjusted EBITDA basis, SG&A expenses are down 56 percent. The 2018 adjusted EBITDA results include an approximate $8 million bad debt charge related to Sears and Kmart. Excluding that from the 2018 results, SG&A is still down 39 percent.

Total revenue, representing royalties on licensing deals, dropped 23.2 percent to $35.5 million from $46.2 million due to the loss of DTR arrangements for Mossimo, Danskin and Royal Velvet and the impact of the Sears bankruptcy on Joe Boxer, Cannon and Bongo.

In October 2017, Iconix said it had been informed by Walmart that the DanskinNow license, which is a diffusion of the Danskin brand, will not be renewed beyond January 2019. Walmart’s core women’s activewear labels are Avia and Athletic Works.

In its 2018 annual report, Iconix noted the Danskin brand had five licensees including a new addition of footwear for 2019.  Even after the termination of the Wal-Mart retail license agreement, Iconix said it believed Danskin had a solid distribution of retailers, including Amazon, Costco, Walmart.com as well as a strong presence at TJX Cos.

<span style="color: #a8a7a7;">Among other brands exiting DTR deals, Mossimo ended its exclusive agreement with Target on October 31, 2018 and Royal Velvet ended its DTR deal with JC Penney at the start of this year.

Among its segments, Women’s sales declined 32.1 percent in the quarter to $10.3 million. Operating earnings in the segment, on an adjusted basis, improved 31.9 percent to $10.1 million. The sales decline reflected the transition of Danskin and Mossimo DTRs and the impact of the Sears bankruptcy on Joe Boxer and Bongo. The segment also includes Ocean Pacific/OP, Rampage, London Fog, Mudd, and Candie’s.

Galvin said the company is gaining “less traction” than expected in securing new DTR relationships for Mossimo in the U.S., although the brand is finding success outside the U.S. OP was not renewed in 2017 by Walmart, in a past DTR deal, and the relaunch with new licenses is gaining some traction. Galvin said about OP, “We’ll see, I think, some improvement going into 2021 because, obviously, any of the deals that we’re signing today, there may be some second-half of 2020 benefit, but the lion’s share will come in 2021.”

In the Men’s segment, revenues in the quarter advanced 9.1 percent to $7.94 million. Adjusted EBITDA vaulted 167 percent to $3.3 million. The sales gains were primarily due to higher sales in Buffalo and Starter. Brands in the segment also include Rocawear, Zoo York, Ecko Unltd, Artful Dodger, Umbro, Lee Cooper, Ed Hardy, and Pony.

Home segment revenues were down 51.4 percent to $3.43 million. Adjusted EBITDA sunk 16.1 percent to $3 million. The sales decline was principally due to the impact of the Sears bankruptcy on Canon, the DTR transition of Royal Velvet and certain advertising costs against revenue at Charisma, which has a DTR arrangement with Costco. Other home brands include Fieldcrest and Sharper Image.

International sales declined 17.4 percent to $13.8 million while adjusted EBITDA was flat at $9.02 million. The sales decline was attributed to lower overseas sales of Lee Cooper and Umbro. The Umbro decline reflected a decision to terminate the soccer brand’s licensing arrangement in China. Said Galvin, “We think that we have had the wrong partner for Umbro. We’ve terminated that, and we’re assessing other options in order to expand that.” He did note that Starter now has close to 20 stores in China.

Galvin, who was appointed CEO last October, said that during the quarter the company finalized significant new agreements for Fieldcrest, Cannon, OP swimwear, and accessories in China; Buffalo for underwear and small leather goods across Asia; Lee Cooper for eyewear in Asia Pacific; apparel and bags in certain European countries; and bags and accessories in Israel. Major renewals were secured for Umbro in Brazil, Cannon in the Middle East and for Rocawear watches in the U.S. and Canada.

<span style="color: #a8a7a7;">Overall, Iconix signed a total of 155 new, or renewed, license agreements in fiscal 2019, representing total aggregate GMRs (guaranteed minimum royalties) of $126 million over the life of the agreements. The 155 new, or renewed, license agreements represent a 29 percent increase in the number of deals signed versus last year at the same time.

Iconix, also during the quarter, entered into a settlement in respect of its shareholder class action litigation and has reached an agreement in principle with the SEC staff regarding the ongoing SEC investigation. The shareholder class action settlement amounted to $6 million, all of which Iconix expects will be reimbursed by insurance carriers. On the SEC investigation, Iconix recorded a $5.5 million charge, representing the amount Iconix expects to pay on the final settlement.

Galvin said, “As mentioned in prior calls, we have also resolved several other outstanding lawsuits during the first half of 2019. So, to date, we have made great progress resolving long-running material legacy disputes and legal matters.”

Iconix said it is currently in compliance with the total leverage ratio and asset covered ratio of financial covenants under its credit agreement, as well as its interest-only debt service coverage ratio under its securitization facility. Additionally, current projections show the company will remain in compliance through at least 2021.

For the year, adjusted EBITDA is still expected to range between $74 million and $78 million. The company slightly reduced the high-end of its revenue range and now expects revenues between $145 million to $149 million for the year. For 2018, adjusted EBITDA was $74.6 million, and total revenues were $187.7 million.

Photo courtesy Iconix