Iconix: Another Quarter Of Progress And Another Probable Beat

| About: Iconix Brand (ICON)

Summary

Iconix has strongly executed its game plan to increase social media marketing and actively manage the brands.

Its fall apparel lines on the whole have high quality designs.

The Peanuts brand has had mixed news the last three months.

Iconix is laying the groundwork for international growth.

Other positive steps in the last three month include strengthening its board with 3 strong new directors.

In the last article on Iconix Brand Group (NASDAQ:ICON), which you can read here, I examined the next fiscal year which starts January 1st. In this article, with the next earnings report about two weeks away, I will describe the developments of the most recent quarter with an eye to how they will affect the coming earnings report, and also future revenues and earnings. In the next article, I will explore Iconix's valuation and upcoming catalysts.

In the last article, I estimated Iconix would grow sales between 2% and 6% in 2017 as a result of the variety of initiatives the company has begun, and due to company chairman Peter Cuneo and CEO John Haugh re-energizing the staff. Based on those things and the following developments, I believe the company will hit the upper end of that estimate for 2017, and potentially surpass it. I also believe another earnings beat is very probable, this time stronger than last quarter's 4 cent beat:

Executing on its social media strategy

One of the key strategies Iconix is using is to sign celebrities who have large social media followings, who are very fashionable and who are highly active online. Cuneo noted that this strategy allows them to get far more bang for their marketing buck. In the last three months, the company appears to have executed strongly on this front.

Perhaps its biggest move was signing celebrity Jenna Dewan Tatum to represent Danskin. You can read the whole story here. This is a great move for Iconix because a celebrity who's also a top dancer is a perfect match for the brand, she's got a prime-time dance reality show on NBC coming out, and a recent YouTube video series whose initial video went viral.

She's already popular, and a prime-time big 3 network show will take her to the upper echelons of stardom. Tatum will be both a judge and mentor. Because of the popularity of shows like Dancing with the Stars, So You Think You Can Dance, and The Voice etc., this show will probably be promoted heavily. The article refers to their being many celebrity guest appearances on the show, which brings in viewers.

Danskin is one of Iconix's biggest brands and is sold at Lord & Taylor, Urban Outfitters (NASDAQ:URBN), Wal-Mart (NYSE:WMT), danskin.com, Amazon (NASDAQ:AMZN) and specialty stores. She has 3.1 million followers on Instagram, 720,000 on Twitter and 2.1 million likes on Facebook. To add to it, she's a huge fan of Danskin As she says in this video, "I started dancing at age five. My first leotard was a black Danskin. When this call came around, it was the fastest yes I've ever given."

A month after the first shoot, the media continued to write articles about her and Danskin such as this E Online article. Her first campaign for Danskin is launching this fall including in Teen Vogue, Harper's Bazaar, Self, Glamour and InStyle.

A plus is that she's married to Channing Tatum and is part of a celebrity couple, which means she gets additional coverage from the entertainment TV shows and websites. The articles often mention her connection to Danskin such as here and here.

Another development is that Iconix's selection of DJ Khaled to represent and promote Rocawear seems to have been a great move as his new album released July 29 became the #1 album on the Billboard 200 chart. As the article says: "The album features a bevy of A-list collaborators, including Jay Z, Nicki Minaj, Kendrick Lamar, Lil Wayne, Rick Ross, Nas, Future, 2 Chainz and even Meghan Trainor."

He also went to No. 3 on the Artist 100 chart, up from No. 23, which was his previous peak. Then in mid-September, one of his songs reached platinum. So Iconix's hiring him this summer was very well timed.

The singer, producer and record company executive is the most popular hip hop artist on Snapchat and is very big on social media as you can read here and here. He's super active on social media and loves to fully support and promote things he's involved with, which is great for Iconix. This article from August said that he's been actively promoting Rocawear on his social media pages:

"When we shot DJ Khaled for Rocawear, he snapped all day, really reinforcing the relationship he has with his audience and allowing a brand like Rocawear to embrace his movement," said Aleesha Smalls, VP of Digital, Iconix Brand Group. "For Rocawear, that is important because we want to give the consumer an authentic, behind-the-scenes look at the brand on top of introducing them to new product and content. This is just the beginning of exclusive content DJ Khaled plans to reveal on Rocawear digital platforms. Over the course of the Fall season, Rocawear and DJ Khaled will be revealing his four major keys to looking luxe throughout the fall on rocawear.com."

Involving celebrities in development of designs

Another strategy Iconix has adopted is involving its celebrity brand ambassadors and spokespeople in shaping the designs. In the recent quarter, for example, MMA star Ronda Rousey, who is Iconix's brand ambassador for Buffalo David Britton, was involved in helping the brand create a line of comfortable but flattering jeans for curvy, athletic women. Then, she appeared at the Project fashion show in Las Vegas to promote the line and meet with buyers from retailers.

This has three benefits. One is that the celebrities become much more personally invested in supporting the lines if they're helping to design them. Second is that fans of the celebrities are more likely to believe the celebrity likes the brand if they're more involved in it. Third is fans are also more likely to buy a clothing line if they know the celebrity was involved in designing it. These are the reasons that so many celebrity fashion lines do well. Basically, Iconix is getting a similar effect for a far lower price.

As this article says,"Rousey comes across as more than a celebrity spokesmodel for Buffalo. …. Buffalo and Rousey are sponsoring a social media sweepstake that allows the winner to meet the 29-year-old athlete in her training gym in Southern California."

Another example is Iconix brand Ecko involving star musician Prince Royce is designing his own line. In this YouTube video, he says: "I'm excited to start getting into fashion. My dream has always been to get into fashion. I'm really happy and excited with this opportunity to release my first line, and I just want to be involved in it."

Royce has 33 million Facebook fans and 6 million followers on Twitter. He has an appealing personality, a big heart and is charismatic and well spoken, so I think he's a score for Iconix. In the video, he says he wore Ecko growing up so he has a strong connection to it and is excited and honored to be part of the brand. Dillards and Ecko held an online promotion in July to give away VIP tickets in 12 cities to see Royce in concert and meet him. Ecko also recently had Bishop Nehru do a new music video wearing an Ecko shirt.

Saving money on marketing

In August, Cuneo said the company's marketing is costing less than they expected. If the company continues to save money in this area, it will help increase earnings this year and in future years.

In the past, Iconix used to just hire a major celeb for each brand who would participate in a photo shoot and say a couple of good things about it; and that was pretty much all. Now, the new approach is to find celebs who love the brand, who love fashion, are making the brand a significant part of their image and career and are active in social media.

When a celeb already loves a brand, they're probably willing to accept much less money to promote it because they already want it to do well and are happy to be associated with it. Also, when they have an interest in being involved in the fashion industry, they're have added incentive to do it for less money.

Another common factor I've noticed is Iconix is getting up and coming celebs who don't command the big bucks that fully established celebs get paid. Plus the rising stars are hungrier and will usually work harder to promote stuff. They're probably paying DJ Khaled about 1/8th to 1/4 of what people who are already big names would require to be paid.

On the August earnings call, Iconix said that the vast majority of its marketing budget for the year hasn't been spent yet. They said they would be increasing marketing spending in the second half of the year. That should mean higher revenues and earnings in Q3 and Q4. Related, I expect we'll see a few other very good marketing developments in the coming months.

In August, Haugh also said some active brand management efforts that recently began were already showing positive sales results in the first month of Q3.

Executing on fashion and design

I've visited the stores and websites of many of the retailers that carry Iconix brands in the last three weeks, and on the whole the company's fall lines are high quality. For example, Rocawear's juniors and women's lines are excellent, and the men's lines are pretty good. You can see some of the junior's apparel here. Most of the men's lines are less over the top than the DJ Khaled photo shoot clothes, and I think that's a good thing. Bold clothes grab attention in photo shoots, but many guys want milder or subtler clothes. They also have hats, sunglasses, watches, belts etc.

Their Facebook page has almost 400,000 likes and has many quality pictures and posts. Besides DJ Khaled, they have Don Benjamin, Justine Skye and others modeling or wearing the clothes. While Iconix groups Rocawear in its men's lines, it's smart that they're making a strong move into women's apparel it is a far bigger market than men's.

Also, the women's and juniors' lines they've come out with have broad appeal - well beyond just urban. As in the music world, the big bucks are usually in "cross-over" and having broad appeal. The number of albums that Drake or other crossover musicians with broad appeal sell compared to hard-core guys is often big. The same is true with other musical genres, and the same is true with clothing.

Not all fall lines were high quality. The men's Starter lines at Wal-mart were average - some designs were strong and some below average. But overall, the brands have quality fall lines. Only one month of fall was in Q3, so only some impact may show up in the next earnings report. Nevertheless, it's a positive that the designs are on track, which is a crucial element of success.

Peanuts: a bunch of advances and a sizable loss

A piece of bad news occurred last week as Met Life announced it was ending its commercial licensing of Peanuts at the start of 2017 due to the fact it sold most of its U.S. life insurance business earlier this year and in a few months will be out of that business entirely. While nobody knows what Met Life was paying, it's estimated it was about $10 million to $12 million per year. According to this article, products featuring Peanuts characters generate about $100 million in annual revenue for Iconix, a figure that will soar to $371 million this year. "The Peanuts Movie" has now reached over $245 million in revenue, and an analyst said "the movie's popularity led to additional licensing deals for Iconix."

One such deal was with Jam City, a major gaming maker, who has licensed Peanuts for a mobile gaming app as described here.

Peanuts is handled by a joint venture between Iconix, which owns 80%, and a company connected to the Schulz family, which owns 20%. The joint venture has over 1,200 Peanuts licenses including with Hallmark, Universal Studios, Warner Bros., Cedar Fair, H&M, Benetton, Old Navy, CVS and Walgreens. Products with Peanuts characters bring in over $2 billion in sales per year.

Financial and ownership details aren't largely unknown. For example, news articles have often implied the Schulz company has the right to decide whether more movies get made, even though it only owns 20%. Also, Iconix a few years ago paid only $175 million for its 80% stake, and it's a little hard to believe they could get $8 million in Met Life licensing a year plus all of the other licensing including movie revenues for that price. For those reasons, it's possible the Schulz family had a clause about how much of the pre-existing Met Life revenue would go to them. It's most likely they didn't, and Iconix was getting 80%, but we'll have to wait to find out for sure.

My guess is that Cuneo saw this coming at the start of the year when Met Life began selling its personal insurance business, and is why Iconix launched a Peanuts television series and made the deal with Jam City for the mobile game. Cuneo is a master at amplifying and monetizing entertainment characters as he did with tremendous success at Marvel.

He knows that the efforts all build upon each other. The movie makes it more likely people will watch the TV show. The movie and TV show make it more likely people will play the mobile game, and more likely they'll buy t-shirts, mugs and other products. People wearing Peanuts gear is kind of like free advertising for the brand. All of the above make it more likely companies will pay to use Peanut characters in their advertising.

The Met Life news won't affect Q3 or Q4 earnings because it doesn't go into effect until the start of the year. While it's unlikely Iconix will find an individual company to spend $10 million a year for advertising, the Peanuts name is bigger and stronger now than any time in the last 10 years due to the various things above. The Peanuts Halloween TV special just had 1.7 million more viewers than last year, a gain of 28%, and beat everything in its time slot. I believe Iconix will be able to replace at least half of the Met Life licensing with other advertisers. Perhaps more importantly, the rejuvenation of the brand is probably much bigger in total than the loss of Met Life.

Part-way through this year, Iconix executives said they weren't counting earnings from any of their new initiatives in their earnings forecasts, and the Peanuts TV show and game are new initiatives. So I expect we'll hear the company say on one of the next three earnings calls that the gains of the TV show, game and other licensing deals have either equalled or exceeded the loss of the Met Life licensing.

Even if not, as I explained in the last article, reductions in expenses in 2017 will add about 6 to 9 cents to earnings per share total, which should make up the difference.

Overseas expansion

In August, the company said it's significantly increased the size of its overseas staff and now have teams on the ground in China, Latin America, Europe and other regions. and are actively evaluating acquisition opportunities for use of its large amount of overseas cash. The company announced that overseas cash grew by over $10 million with the sale of the rights to Ed Hardy in China.

If that overseas cash pile starts bringing in a 14% return (via acquired brands) rather than a 2% return, that could be an annual earnings gain of over $8 million, or 16 cents per share. They're probably making much less than 2% a year on that cash given that it's most likely not invested in stocks, and given that a sizable amount of Asia and Europe have below zero interest rates.

Their international team is also expanding some domestic brands such as Danskin and Ocean Pacific into overseas markets. This is an good opportunity for those and other brands because numerous people internationally like American culture and fashion. Iconix's move into an online focus gels well with expanding domestic brands into overseas markets because people overseas are online and on social media.

Many of them consume American movies, TV shows and music, so Iconix's use of celebrities will also help this international expansion, and will leverage existing marketing efforts to generate more sales.

New board members:

The company also announced it was expanding the size of its board by adding two new directors, including the head of marketing for media at Time Warner:

Ms. O'Hara is a marketing and advertising executive with expertise in social and digital media, as well as data analytics and technology. In her current role as Chief Marketing Officer, Global Media, of Time Warner Inc., she drives the marketing strategy and business innovation for the $58 billion media and entertainment company by leveraging consumer insight, data and new technology platforms.

Iconix also announced it will soon replace an existing director with Kenneth Slutsky at the 2016 annual meeting. Slutsky is "an investor in both private and public sector enterprises. His experience spans numerous industries including: technology, energy, real estate and financial services." So in total, there will soon be 3 new board members.

In a video interview of Cuneo a couple of years ago in which they were asking him to give advice to companies, he heavily emphasized the many benefits of having a highly qualified board: their expertise and knowledge, their ability to engage with each other and with management in debates, brainstorming options and assess the options, and also their networks and connections. I was hoping after Cuneo became chairman, he would start bringing on new board members of a high caliber, so I'm happy he has.

Large profit on sale of Complex Media

In August, Iconix announced that the sale of Complex Media came in at the very top end of the early reports of the potential sale price range, for a gain of $10 million. Nothing is guaranteed and it could have come in at only break-even.

The company said that they only took some of the gain on the sale in the earnings of the last report, and will take the rest of the gain in the EPS of the next quarter. That along with other factors should make for another earnings beat, probably much larger than last quarter's beat of 4 cents.

For example, if $6 million of the $10 million gain is realized in the next earnings report, that's about 12 cents more EPS, and would be a dramatic beat. If the results of its new efforts start to show up in Q3, that would also be additional earnings. As noted, the company has indicated its marketing expenses are lower than expected. It's also said that new projects were not included in its earnings forecasts. That's 4 different ways in which earnings have a solid probability of being higher than expected.

In addition, if they use the $35 million proceeds from the sale to pay down debt, there will be two benefits: 1) If they get an 8% discount on the debt, that saves $2.8 million. 2) It reduces annual interest expenses, which is an ongoing gain. They've taken an asset that had an intangible book value of $25 million that was generating earnings, and generated $35 million in cash, plus probably ongoing interest savings.

Reasonable oil prices continue

The price of oil is likely going to stay between $40 and $60 for the next few years. This is because whenever it goes over $50, shale companies will bring rigs and wells online and increase the supply well before it can get over $60 and drive the price back down.

So consumers are going to continue to save about 40% or more on gas for the next several years. While during the first 18 months of low gas prices, consumers tended to put the extra money into home improvement and new cars. Some of that extra money is likely going to go into apparel and home goods in the coming 18 months, as new car sales are expect to go down.

Conclusion

Iconix has executed strongly and moved forward in several important areas in the last three months. Results of these efforts will likely start to show up somewhat in the next earnings report, and show up significantly in Q4 and in 2017.

This combined with the large gain from the Complex Media sale and other factors described in previous articles will likely make the coming report a strong beat.

Even if the company simply maintained its current earnings of over $1 per share, it would be an earnings-generating machine and worth much more than it currently is. If it increases its earnings as I expect it will, it will be worth far more. With each earnings report that meets or beat estimates, confidence in the company grows. In the next article, I will look at the current and future valuation, and upcoming catalysts.

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.