This week I was part-way through writing my next installment in my series on probable near-term catalysts for Iconix Brand Group (NASDAQ: ICON). The topic was the hiring of a new CEO resolving one of the uncertainties affecting the company. Last night, an announcement by Iconix after the market closed forced me to complete it right away: The company announced its new CEO will be John Haugh, an experienced retail executive who has worked for General Mills, Universal Studios, Payless ShoeSource, Mars, Build-A-Bear and Luxottica/Sunglass Hut. He was a President at the latter three companies, including being President of the Mars Retail Group. You can see his photo and comprehensive employment history at ZoomInfo.
Since the departure of former CEO and Chairman Neil Cole in August, the majority of media reports on the company have portrayed the uncertainty at the top as a weakness of the company. The announcement takes care of two uncertainties: Who will the new CEO be and will Peter Cuneo stay on as Chairman of the Board to manage the big picture aspects of the company.
Cuneo Staying As Chairman
The answer to the latter is a clear yes. In the press release, Cuneo said he would become Executive Chairman (before his title was Chairman, and for simplicity's sake, I'm referring to him by that title in the rest of this article).
A key detail is he said that his "focus will shift to areas of need where I can best help the company." Executives carefully choose their wording in releases like this. Investors will be pleased he is not reducing his focus, but rather shifting it to other areas of need the company has. This is where the greatest portion of the long-term catalyst of this hiring will be: The company now has double the executive firepower.
As I will explain below, the dynamic duo of Cuneo and Haugh will prove to be far more effective than Neil Cole alone. At the time of Cole's departure, many saw it as a loss. In fact, it's going to turn out to be a sizable gain and a true blessing in disguise because Cole suffered from founder's syndrome. Like most founders, he was not a good fit as long-term CEO for the long-term success of the company he founded. More on this below. For now, let's take a look at Cuneo as chairman and then a deep dive into who the new CEO is with a wealth of research I've done on him for the last 7 hours.
Where to start with Cuneo? One detail is he has a sizable financial incentive to stay and to lead the company to a resurgence: He's been issued a large number of stock options. Cuneo has said he thinks the company is undervalued. In fact, he recently led the implementation a major poison pill plan to prevent Sports Direct from taking over the company at recent prices. So he knows there's serious upside and it's in his best interest for Iconix to reach that upside.
In addition, I'm pretty sure he loves winning and that he's not going to allow his distinguished career to end with a failure. So I think he's emotionally invested as well. In fact, after he took over, he could have easily coasted until a new CEO was hired and let the new CEO do the heavy lifting. Instead, as I describe below, Cuneo went above and beyond and took major steps to improve the company.
Besides helping the company significantly, I think this deep involvement has led Cuneo to be even more emotionally invested in the company. He's put numerous changes in motion, and anybody who's initiated changes knows: If you're the one who puts the changes in motion, you're far more invested in how they work out. Also, he now knows the staff of the company far better, which probably adds to the care he has for the company.
Also, his deep involvement in running the company the last 7 months and remaining 1 month will make him a much better chairman. He now knows Iconix inside and out. He's a naturally talented executive and leader, but 8 months as CEO makes him much better as chairman in terms of his deeper direct knowledge and understanding of the details of Iconix.
One other detail about the press release is important: when Cuneo became CEO, he was announced as "Interim CEO." In this press release, he's Executive Chairman - there is no use of the word interim anywhere in the press release. Most chairmen stay on for at least 3 years, and sometimes for far longer. I think that 3 years by Cuneo would be plenty. If you haven't seen an interview with Cuneo yet, I highly recommend you watch this video.
I rarely see an interview in which an executive so clearly understands so many things about running a company. For example, you can see he's good hearted and respectful. Yet if doing the right thing for a company makes some employees unhappy, he will not hesitate to do it.
Anyway, an important point in the video is his emphasis on having a strong board in order to tap into the knowledge and connections of the board members. I'm fairly sure this is one of the company's needs he'll be focusing on taking care of. He's very well connected and people like working with him, so I predict the Iconix board will land 2-3 high quality board members this year. Each of these will probably give a 1% to 2% bump to the stock price. And more importantly, their wisdom and connections will give a bigger gain to the stock over time.
Assessment of John Haugh
On reading the press release, my first impression of Haugh was "very good." On deeper research, I've upped my assessment to excellent for the following reasons:
1) He has worked in a wide range of areas including marketing, strategy, sales, merchandising and e-commerce. The more areas an executive has worked in directly, the better. It means he knows those areas deeply and how they fit into the whole of a company. It also means he can manage the people in charge of those areas much better.
2) He has extensive experience in branding. For example, yesterday at almost the exact same time Iconix announced his hiring, a Forbes.com writer featured him in an article about the importance of branding and the success of his innovative approaches at Sunglass Hut, the largest retailer of sunglasses in the world. Haugh oversaw both the Sunglass Hut brand and the individual sunglass brands Luxottica owns such as Ray-Ban and Oakley. One quote from the article's author: "No one can deny the chain's success."
Haugh also seems to have marketing savvy and a mind for tapping into the "cool" that's important for branding. For example, he hired Georgia May Jagger, the model and daughter of Mick Jagger and Jerry Hall, to be an ambassador for Sunglass Hut and contributor to the company's blog, then scored a social media hit with her and the "94 shades of summer" campaign.
3) He has significant experience in licensing as a licensor and licensee. For example, the Mars Retail Group is responsible for all of Mars and M & Ms licensing world-wide.
According to License Mag, Mars Retail Group in 2008 (soon after the time Haugh left for a new job) was doing $280 million in licensing, placing it at #66 in the licensing world. The group's licensing includes publishing projects, sporting goods, electronics, party goods, collectibles and social expressions, and has retail support programs in all major regions of the world. Sunglass Hut is also a licensee of over a dozen major sunglass brands.
4) At the same time, he has also worked extensively on the retail side. For example, Sunglass Hut has a few thousand locations, and the Mars Retail Group includes all of Mars retail stores including its M & Ms World stores around the globe. This large amount of experience in retails means he understands retail businesses, their needs and their dynamics. This will help him connect with Iconix's retail partners, and allow him to better help them. Related, while at Luxottica, he worked extensively with Macy's so he understands big retail chains.
5) He has directed major new initiatives with creativity. For example, at Mars, he launched a gourmet line of chocolate named Ethel's and a new chain of cafes named Ethel's Chocolate Lounge serving coffee and premium deserts. He successfully garnered press coverage with the creativity of the cafes, for example, in the New York Times here and USA Today here: "The lounges feature overstuffed pink-and-brown-striped easy chairs. Walls are decorated with posters saying, "Chocolate ... the alternative to shoe shopping."
The division he ran at Luxottica expanded the number of Sunglass Hut licenses with Macy's and signed a major deal in November, 2015 with Macy's to open 500 LensCrafter's "stores within a store" at different Macy's locations.
6) He has worked with a large variety of products. For example, the Mars Retail Group's retail stores sell candies, apparels, home decor and office products, collectibles, and toys and games. He was head of marketing and sales for Universal Studios. See the Zoom Info link above for more.
7) He's proven himself online. I examined Sunglass Hut's website and it is first-rate in design, branding, user experience/interface and speed. Judge for yourself here.
I was able to locate his Twitter page and see that he posts regular Tweets encouraging, championing and thanking his staff. He also evangelizes Sunglass Hut in his posts, which I think is important for executives these days. The stocks of companies whose CEOs promote their companies via social media get regular gains from it. A great example is how much Tesla's stock has benefited from Elon Musk tweeting regularly, whether you like him or not.
8) Since pictures are worth a thousand words, here are pictures of him on Twitter. Only some photos have him in it, but the ones that do convey to me that he's likeable and somewhat charismatic, yet also a regular guy and approachable. Throw in positive, fun and engaging, but not overly so. For a company based largely on fashionable brands that is looking to expand more into entertainment, I think it's a plus for the CEO to be somewhat charismatic. I view charisma as a mix of things such as being good-looking, upbeat and engaging. At the same time, you want someone who's somewhat down-to-earth and approachable (not pretentious).
9) Based on his experience, skills, knowledge and personality, I think the Iconix staff will like him and like working for him. This makes a big difference in numerous ways. If you hire a jerk, or someone without much experience in your industry, you run a high risk of hurting employee morale rather than helping morale.
10) For lack of a better way to say it, his age seems to be a good fit for a CEO. Data from Fortune says the average age of CEOs at the 2,500 biggest public companies when they become CEO is about 49 years old. Haugh is 52. I suppose it takes a lot of energy and burning the candle at both ends to be CEO of a major company. Being 47 myself, I can say I have less energy and ability to put in really long hours than I did even 5 years ago. My father was CEO of a Nasdaq company that grew heavily to the point that he realized that to take it to the next level (and the market always expects you to go to the next level), he would need to replace most of his top management team (COO, CFO, etc.) to do so because they didn't have the skills and experience needed.
But also, he was in his early 60s and no longer wanted to put in the energy and the "heavy lifting" that is needed from a CEO to bring a company to a new level. Heavy lifting includes things like long hours, road travel, making some staff members unhappy, firing people, building new partnerships etc. Those were two of the main factors in his supporting a bid from a bigger company to acquire them. The price offered was decent, so that was a factor. If he told his board that he could bring the company to a higher price than was being offered, they would have gone with him. But he didn't have the energy and his team didn't have the experience and skills. So hiring a CEO is a matter of finding the sweet spot where a person has the experience and skills you need, and yet also the drive and energy. That's not to say a new 65-year-old CEO can't do well. But 65 is the age most people retire, and there's a reason for that.
Haugh has more than enough experience. A guy I was the executive coach for at Google when he was VP of Sales there was hired to run AOL at the age of about 37. He's done quite well there and has turned the company around. AOL is not your parent's AOL. They own the Huffington Post, Tech Crunch and a bunch of other popular websites. A college housemate of mine who was CFO of Merrill Lynch was offered the CEO role at Comcast when he was 40 and he turned it down in favor of becoming CFO of Blackstone. If Comcast and AOL are comfortable hiring people 37 and 40, Iconix investors should be plenty comfortable with Haugh at 52. He's got plenty of experience, and as mentioned above, his experience is a very direct fit with Iconix.
11) Haugh strongly understands international business, which is important to the growth of Iconix. For starters, I appreciated that he got his MBA in Switzerland. It means it's highly likely he has sensitivity to differences and nuances in cultures. This is very important in conducting business in foreign countries, particularly in opening doors to new partners, winning them over and making deals with them. Living in a foreign country for a couple of years gives this understanding more strongly that visiting foreign countries. Also, it means that he probably speaks another language very well. If it's French, this helps with partners in France, Canada, Switzerland, Belgium and parts of Africa and Asia.
More importantly, Luxottica is based in Europe and Haugh has worked internationally in several of his previous companies. It would take too long to describe all of them, so suffice it to say he has more than enough international retail and licensing experience to be a great fit for growing Iconix's in international markets. The world, on the whole, is very into American brands and American culture. This is a great opportunity for growth for Iconix that has only been partly tapped into so far.
12) He has developed a large number of connections via the various companies he's worked for. Connections come in very handy in the world of licensing in various ways ranging from trust to credibility to introductions to new partners. I view his having been Vice President of Sales and Marketing for Universal Studios as a positive for connections and also for the knowledge needed for Iconix to move further into entertainment.
Cole and Founder's Syndrome Vs. Cuneo and Haugh
This is an easy win for Cuneo and Haugh because I think either Cuneo or Haugh alone would have been better than Cole because Cole was suffering from founder's syndrome.
It's somewhat well known that founders usually aren't very good at running sizable companies. The talents needed for founding a company (the vision for something great, the dynamic personality to generate enthusiasm for it and launch it etc) are very different than the talents needed to operate a company (doing the day-to-day grueling operational things that are important). This showed up in ICON with Cole having a great vision and putting it into play, but then over time neglecting to do the operational things a strong company needs to do: The things which Cuneo has already done within just a few months of taking the helm:
A) Review all parts of the business and make hard choices. As Cuneo said on the November call: "Three months ago … the board, our new CFO, and I decided it was very important to conduct a broad, in-depth review of the company's operations." By the time of the call, they had already completed it. The review led to Iconix terminating some of its licensees that led to a short-term loss. But it will result in long-term benefit by giving the licenses to better licensees.
B) Meet with extensively with customers/partners to get feedback on how to improve, and to explore new opportunities. Cuneo on the November call said: "First, over the past three months, I've been meeting with our key licensing partners and I'm encouraged by their continued commitment and desire to work collaboratively to grow our brands. What I am learning is that we can support them better. Stepping into this role, my expectations were the growth in the U.S. was limited. Now, I believe with the right investments in our brands and proper support to our licensees and partners, there are significant opportunities to grow organically in the future in the U.S."
C) Put systems and processes in place to ensure things are taken care of. Cuneo on the November call: "With regard to processes, we are implementing additional procedures and controls relating to transactions and other business arrangements with licensees and in our joint ventures. … I am not waiting to implement these important changes. We believe these and other plan changes will benefit the company greatly."
D) Continue to evolve and improve the business model. Cuneo: "… we've really looked at how we support our DTR partners. I think historically, philosophy has been that when we do these deals, we largely leave the promotion of the brands to the DT partners themselves, to the retailers. And over a period of time, I think it's safe to say that some of our brands are getting stale. The retail partners certainly support these brands in store and with local advertising. So we think that we needed to, if you will, reinvigorate some of these brands with the more intensive advertising and also with advertising that reaches the younger generations. So, we're going to be doing a lot more in the digital word with regard to that. …. we are looking at 2016 as a reset year. Our 2016 budget includes a 15% increase in advertising spending. But more importantly, we plan to spend these dollars differently than in the past, with a much greater focus on digital promotion. The budget also includes a 15% increase in head count with important additions to the financial function to international operations and to the marketing organization to better support our DTRs. …. We are also considering investments in entertainment content, which we were not willing to affect previously…. we are on the right path towards supporting and evolving Iconix to capture the full potential from our next stage of growth."
You can read the full transcript at Seeking Alpha here.
The symptoms of founder's syndrome can be wide-ranging but as this site explains, it can include that the founder tends to:
* Be skeptical about planning, policies, and procedures. They claim, "These processes weigh me down."
* Make reactive, crisis-driven decisions with little input from others.
* Motivate by fear and guilt, often without realizing it.
* Have a very difficult time letting go of the strategies that worked previously in the organization, even if they know the organization can no longer function this way.
As detailed above, Cuneo in tandem with the CFO, the board and others, has already changed the first, second and fourth items in the list. I don't know if #3 was a problem, but given Cole's COO and CFO left, it seems it may have been. For a view of how Cuneo manages people, view this video.
The Solution to Founder's Syndrome
There are hundreds of articles about and studies of the common problems of founders including this. Fortunately, Iconix has already achieved the solution, which is to replace the founder or for the founder to leave of his own accord. The latter avenue is far better because it makes for a peaceful transition and doesn't create bad blood among staff members who had a bond with the founder. Sometimes a founder can be taught/forced to change, but heavily changing people is very hard and usually fails.
Many people in the business world, including Cuneo and Haugh, know how to do the things that founders don't. If turnarounds need to fix a product or business model that flat out doesn't work, they are hard. If the business is earning a bunch of money, and mostly needs to re-finance and make a few common-sense improvements, they are not that hard. I think this is one of Cuneo's easier turnarounds.
One of Haugh's strengths is operations, which makes him a great fit for replacing a founder. Plus, Cuneo has already done a sizable amount of the heavy lifting. Haugh was in charge of 14,000 employees at Sunglass Hut and thousands of locations, and it grew significantly. You don't successfully run things of that scale and grow them without a focus on systems and procedures and without making proactive decisions with input from others. The very things a founder isn't good at doing.
This is evidenced by the fact that one of Cole's main motivations for creating Iconix was that he couldn't deal with the operational hassles of manufacturing products and distributing them, or retailing them. It turns out he couldn't even handle the day-to-day operations of a small 250 person company. 250 people and one location is tiny, compared to what Haugh has managed. While Haugh is very strong at operations, he's also shown considerable vision and creativity at his past companies, so he seems like a great mix of operational ability and creativity.
Chairman's can either play a significant role or a smaller role based on various dynamics. The fact that there is a new CEO, and that Cuneo was CEO for the most recent 8 months and has been a board member for several years means that he's highly likely to play a significant role.
Cuneo is good at delegating, so he won't micro manage Haugh. But if you watch the video of Cuneo above, you can bet he will make his opinion known and he will make sure the company goes in the right direction on major matters, even if it makes some people unhappy. That said, I think Haugh is going to really like having Cuneo as his chairman. Cuneo is a wealth of experience and wisdom, and he's been through turnarounds 7 times. In the video, he quietly oozes "mentor" in all of the best ways. I think Haugh would actually do a pretty good job without Cuneo, but with Cuneo I think he'll do a great job.
How Will This Catalyst Play Out?
Of the various probable catalysts, I think that this one will probably be more gradual in effect. In essence, I'm fairly sure that when refinancing is announced and it's clear Iconix isn't going to default, the stock price will rise significantly that day: Likely about 10% to 20%, possibly more if a sizable short squeeze occurs. Same with when the SEC closes its probe of the accounting of some of Iconix's joint ventures and there is either no fine or a mild fine that doesn't hurt the company. I'm very confident that both of those will be fast-acting catalysts.
For hiring a high quality CEO, I think it will more likely be a small instant catalyst of a 2% to 4% gain (relative to what the stock would normally have done the same day without an announcement), and that it will be a gradual catalyst from there. The stock gained a little over 1% in after hours trading after the press release. I was out and didn't see the press release until 8.30 pm. And it didn't show up on most major websites such as Morningstar until 8 pm, well after extended-hours-trading was over. So I think the majority of people saw it after extended trading was over.
To some degree, how quickly the hiring affects the stock will depend on how quickly people learn a lot about the new CEO. Given that nearly all media stories I've read since the announcement have been short with only a fairly brief summary of his experience, my guess is that it will take some time for investors to learn a lot about him. Thus my guess that the catalyst will be gradual and ongoing.
For example, when Haugh hosts his first earnings call and people get to know him better, the stock will quietly benefit another 1% (assuming all other factors on the call being neutral). Each time Cuneo gets a new high quality board member, the stock will benefit about 1%. As more people read more articles about Haugh, the stock will gain a little. As analysts come to know more about him, his quality will affect their next price target updates and the stock will gain a little. And so forth.
Also, after about 6 months, the effect of doubling the executive firepower and connections will begin to show up in earnings results, and that will affect the stock price somewhat.
To me as an investor, I don't care much whether a catalyst is a slow gradual one or a fast acting one. As long as the stock prices get to where I aim for it to go.
I think if Iconix only met guidance/estimates for the next year and it refinanced and the SEC probe were resolved, it would trade at between $12 and $14 in a year based on those three factors. With the dynamic duo of Cuneo and Haugh plugging away, I think it will trade between $14 and $16 in a year. Some of the difference will come in the near term from the resolution of the uncertainty at the top, from people learning more about Haugh and gaining perspective that Cuneo/Haugh is a sizable net gain over Cole.
Some of the additional gain will also come from increased earnings (and improved guidance) that start to show up in about 6 months. I say 6 months because some of the changes Cuneo put into motion 3-4 months ago will start having results by then. And the work Haugh does will start to have some results in about 6 to 9 months. This could come sooner because low hanging fruit can often produce some benefits quickly.
A week ago, I would have predicted the chances of getting someone excellent (in terms of quality and fit) at about 30%, someone very good at 35%, someone good at 30% and someone average at only 5%. I wasn't at all expecting a poor hire because the company had the benefit of time: Cuneo was fine on being CEO as long as it took to find a good CEO. But given Iconix's bad press, I wasn't certain if an excellent person would materialize. I estimated an excellent or very good hire would be a positive ongoing catalyst.
I still have one more likely catalyst to write about that I also think has about a 65% probability of occurring. Readers might have noticed that after Part 1 of the series, I stopped using "4 Catalysts" in the titles. This is because after I wrote Part 1, I realized there were 5 probable catalysts. I also realized that during my research I might come across a 6th catalyst on the horizon, so I decided to not use a number in the titles. It will probably be a week until I have time to write the article.
Fortunately, I'm pretty sure the catalyst won't take place before I write about it. That said, the refinancing and resolution of the SEC probe could take place any day so I highly recommend investors accumulate shares now while the price is still low. Opportunities like this don't come along often.
With the affirmation of Q4 and 2016 guidance mentioned in the recent press release, the risk of a miss or of reduced guidance is gone and a small catalyst from meeting guidance is still likely. The affirmation of guidance was a small part of the press release with most of it focused on restatements of financials, which is boring at best and probably a negative to some (even though it didn't change the company's real business results or free cash flow). In the earnings report and call, there will be a strong focus on earnings and 2016 guidance.
Plus, there are still chances for other catalysts on the call such as an announcement that some debt was bought back at low prices. I think there's also a decent chance for a 1 or 2 cent beat. When a company affirms guidance, it's not unreasonable for it to report a 1 or 2 cent beat. In other words, it's not required to meet guidance to the penny. If they were still crunching the numbers and were sure they'd meet guidance and had a good chance of a 2 cent beat, they would have simply been conservative and affirmed guidance.
The two major catalysts haven't even taken place yet, and they're the ones I'm most certain of. The hiring of a high quality CEO has now taken place, and even if average investors view him as only very good to start, that catalyst will occur over time, as will the benefits of double the executive firepower and Cuneo focusing on the chairman role. And catalyst in Part 5 has a pretty good chance of occurring.
In my next article, I'm also going to cover some additional factors to be aware of, including the fact ICON rose 300% in a 12-month period starting in 2009. A few people may be skeptical of whether ICON can double in the next 12 months. The charts and analysis I give will show that it tripled in 12 months and that doubling is entirely doable. The stock in the last month has gone up at a pace that would cause it to quadruple in one year. I don't expect it to continue at this pace the whole year, and think in the end we will fairly easily see a double. In a market where most stocks are expected to trade roughly sideways for the year, a double is great.
Disclosure: I am/we are long ICON.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.