Last week the stock of Iconix Brand Group (ICON) dropped by about 65% in one day. The stock deserved to drop somewhat on the release of news that Wal-Mart (WMT) would not be renewing its Danskin Now license past January 2019, and that the near-term decline in revenue from that plus other developments made it unlikely that it would be in compliance with its 2018 debt covenants. The size of the drop, however, was an overreaction.
Popping the bankruptcy illusion
A central part of the overreaction was the fear that the company was going to go bankrupt in the next few months. As Seeking Alpha contributors noted in articles here and here, the company is currently priced as if it’s going to go bankrupt. They both correctly note that bankruptcy is very unlikely.
Iconix was hit with a similar fear of bankruptcy in early 2016. A supposed expert in predicting defaults said there was a high probability the company would default. At the time, I said the chance of bankruptcy was miniscule. I estimated the probability that it would not default at higher than 99.9%. Within 10 months, the stock had doubled in price.
The chance of bankruptcy this time is even lower for these reasons:
1) In early 2016, the company had over $650 million more in debt than it does now. Its amount of debt has gone down by about 48%. In early 2016, its amount of debt was very high for its industry. Now, its amount of debt is within range of average.
2) In early 2016, it had $300 million in debt coming due in a few months. Now, it needs to only improve its debt situation by $100 million.
3) It has more options available than in 2016 when its only option was to refinance.
