Iconix Brand Group, Inc. (ICON), through its subsidiaries, engages in licensing and marketing for a portfolio of consumer brands. The brands are sold primarily in the US, Europe, and Japan. The portfolio includes many famous consumer brands, including Candie's, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific/OP, Danskin/Danskin Now, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Zoo York, and Sharper Image, as well as the Ed Hardy, Ecko, and Peanuts brands.
Many of these clothing brands have been around for decades or even a century or more (Danskin since 1882!). They cover both the mid-range and luxury brands in men's and women's clothing and fashion, as well as a brand such as Peanuts, the famous American comic strip that was launced in 1950.
It's important to understand that Iconix does not manufacture any of the clothing or other products associated with these brands. It licenses the rights to use the brand names to over 1,000 retailers, who are then responsible themselves to manufacture the products. Iconix does provide marketing and "trend setting" services for each brand name.
The first criteria to check in my system is whether the company is a magic formula stock or not. Iconix Brand Group is currently on the 50 over 1 billion magic formula screen. Following my philosophy we give this a score of 1.
Circle of Competence
A business like Iconix is from my perspective relatively simple and understandable. It buys the rights to well known brand names and licenses them to various retailers. This typically means a contract with a particular licensee for a certain number of years where it has exclusive rights to sell products using that brand.
This contract will have a fixed price component, as well as additional revenue that Iconix can earn depending on sales volumes. The manufacturing of clothing and other products under these brand names is the responsibility of the licensee. Iconix will provide marketing and promotional campaigns for each brand.
Being an understandable business, I feel I can score this a 1.5. Also because I have been a consumer of many of these brands - when I was a kid playing sports you were not "cool" unless you had a Starter jacket! However, as I'm not a marketing or retail expert by any means, I cannot give this a full score on my scale.
The business prospects for Iconix over the coming years are very good. This especially because the lion share of current revenues come from developed countries, leaving plenty of room for growth in the developing would. The company has recently started a joint venture in India, and expects future growth in Asia to be strong. Currently international revenues account for just 22% of the total, and the company is confident in its goals to expand this to 33% in the coming few years.
One aspect I like about the business is that it is highly diversified with a variety of brands in different retail segments. It is not overly dependent on one or two contracts, and can maintain revenue and earnings growth even during the transition periods when one brand is moving to a new licensee.
This interesting article from BBC discusses how a lot of the high street fashion brands are looking to China for profits. The strength of Iconix here, of course, is that it has multiple brands operating in various chains, so it is poised to get at least a slice of the pie to benefit from the growth of the Chinese consumer. It doesn't need to win on every single brand in every contract to continue a modest growth rate.
I, therefore, feel that a combination of future acquisitions (which it is well positioned for and has a strong track record of success), together with sales growth primarily in countries such as China will make a 10% annual growth rate very likely to be achieved in the coming 10 years. If the US and Europe both can get their economies on track and returning to modest growth rates then it would be poised for even greater growth.
The company has a respectable share repurchase program in place. The board has authorized in 2011 the repurchase of up to $200 million in stock by 2015. In FY2011, the company repurchased $19.1 million, and by July 2012, it had repurchased $107 million already representing 10% of all outstanding shares of stock, as indicated in the most recent conference call.
The only issues I've seen with this criteria is that the company does not pay a dividend, and also the amount of outstanding shares has increased somewhat over the past several years, which has some dilution effect on shareholder value.
Consumer Brands, whether it be from food, beverages, clothing, or even children's cartoons in the case of Peanuts, typically exhibit some form of economic Moat and in many cases the pricing power of competition can be compelling. Iconix has puchased a portfolio of very strong brands that were already well established in some cases for decades or more.
For sure, most of these brands have exhibited pricing power - I remember when I was a kid all the "cool" kids wanted a Starter jacket and would for sure pay more for them just for the brand. Everyone wanted to wear "boxers" from Joe Boxer, and would happily pay a few dollars more for the brand.
The same is clearly true in the case of Peanuts, or other clothing brands held by Iconix. The moat and potential for increased pricing power I think is quite clear here, and as such I have scored this with a 1.
Having a look at the key balance sheet statistics, we see that debt/equity ratio is about 0.35 and the company has $490 million in debt vs. a total cash of $22 million. While there is some level of debt, the company seems to be generating more than enough cash flow to sufficiently pay its debt ($177 million in operating cash flow last year), and the interest coverage ratio is above 5.
So in conclusion the company seems to be managing debt effectively and using it to grow in a manageable way without adding too much undue risk to the business. We, therefore, can justify a score of 1.
From the company 10-K, we see that the CAGR from 2005 to 2011 for EPS has been an impressive 24%. Clearly over the past decade there has been consistent strong growth, as the company has acquired the rights to more and more brands. There has been no cyclical nature to the business with earnings increases positive every year. I like to see this kind of consistency in a company. I've given this a score of 1.
Margin of Safety
To calculate whether the current price constitutes a sufficient margin of safety, we have performed a simple DCF. We believe that the value of a company should always be principally thought of in terms of how much the company can earn in profit now and in the future for its shareholders. We have used the following inputs:
- Current Earnings: $1.67/share
- 10-year growth rate of Earnings: 10%
- Growth after 10 years: 0%
- Discount rate: 6%
- How confident are we in our earnings estimate? : 50%
This yields an intrinic value of $30.45/share. With the current price at $18.35 at time of writing, this implies an upside of 66% from current levels. I therefore think on financials, the company is definitely undervalued and there is a margin of safety to warrant buying at current levels.
In addition to this, I've calculated that there was an average P/E over 14.1 in the past 5 years. The current P/E of 12.4 is about 14% lower than the average. The industry P/E, however, is much higher at 17.6, 41% upside from the current valuation. In general, I'm not a fan of using the P/E metric to determine valuation on its own, but in this case we can see a simple check gives further evidence of undervaluation. I've scored this criteria with a 1.
Total Score: 8pts.
In conclusion: I rate Iconix Brand Group as a Buy.