Gross Margin Kings – Apparel & Accessory Stocks

Unlike hi-tech companies that license out their technology (see my post), apparel companies that license out their name enjoy the highest gross margins in their sector. Among apparel & accessory stocks are three companies who rely exclusively on licensing/royalty income and enjoy 100% gross margins – Cherokee (CHKE), Iconix Brand Group (ICON) and Mossimo (MOSS). Since Mossimo is in the process of being acquired by Iconix, we will not focus on them for the purposes of this discussion.

The following are the Gross Margin Kings (companies who rule their sector as far as gross margins are concerned) of apparel & accessory sector stocks:

Data in table version:

			Total	Gross	Gross	Operating
		Quarter	Revenue	Profit	Profit	Income
Ticker	Company	Ending	($000)	($000)	Margin (%)	Margin (%)
(CHKE)	Cherokee	07/29/06	$12,409	$12,409	100.0%
66.4%
(COH)	Coach	07/01/06	$514,355	$403,071	78.4%
35.0%
(CROX)	CROCS	06/30/06	$85,633	$46,968	54.8%
27.7%
(ICON)	Iconix Brand Group	06/30/06	$18,409	$18,409	100.0%
59.8%
(RL)	Polo Ralph Lauren	07/01/06	$953,600	$531,500	55.7%
14.0%
(TRLG)	True Religion Apparel	06/30/06	$30,734	$16,352	53.2%
32.0%
(UARM)	Under Armour	06/30/06	$79,965	$38,207	47.8%
4.2%

As the chart notes, gross margins for the group range from 48.8% up to 100%. There are other apparel companies that could have been included in the group, but since they rely on their own retail outlets to distribute their products, their gross margin gets eaten by high SG&A costs. For example the (most recent quarter’s) gross and operating margins for Abercrombie & Fitch (ANF) are 69.1% and 15.6%, respectively. No longer a leader in this sector, Gap (GPS) numbers are 32.9% and 5.0%, respectively.

Notes on specific companies:

• Polo Ralph Lauren (RL): In the most recent quarter ending July 1, licensing revenue was $50.3mm, or 5.3% (total revenue was $953.6mm).
• Coach (COH): Despite enjoying 78.4% gross margins in the last quarter, surprisingly little income comes from licensing. For the year ending July 1, Coach’s licensing revenue was $9mm of the $2,112mm in total revenues (4.3%).
• Under Armour (UARM): For the quarter ending June 30, 4.3% of its revenue ($3.449mm out of $79,965mm) came from licensing. Since operating income for the quarter was $3.369mm, the company was reliant on licensing revenues for its profitability.

As a group, the stocks discussed here have performed pretty well over the past twelve months:

Comments: Coach is a fascinating company here. It enjoys 78.4% gross margins and 35% operating margins, despite minimal licensing revenue and the fact that it operates its own retail & factory stores. Despite a slowdown in retail, to continues to post strong sales & profits, although its P/E ratio has declined over the past year. True Religion (TRLG) has also been posting some solid numbers, but it looks like they might be looking to sell the company. As far as Crocs (CROCS) is concerned, they still need to prove that they are not a one hit wonder.
Related: Coach's second quarter earnings conference call transcript.

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