We are downgrading our recommendation on Iconix Brand Group, Inc. (ICON - Analyst Report) to Underperform from Neutral, following the disappointing first quarter 2012 results.

Iconix posted lower-than-expected first quarter 2012 adjusted earnings of 43 cents per shar; 6.5% lower than the Zacks Consensus Estimate and down 4.4% from the prior year earnings period. The weak results were driven chiefly by revenue declines, primarily due to continued weaknesses in men’s brands of Rocawear, Ecko and Ed Hardy. Total revenue in the quarter declined 4.0% to $88.5 million. Revenue also missed the Zacks Consensus Estimate of $95 million. The soft revenues were also brought about by the transition of the company’s Royal Velvet brand to J. C. Penny Company, Inc. (JCP - Analyst Report), which is expected to impact Iconix in the near term.

Slow demand in the men’s brands of Rocawear, Ecko and Ed Hardy and the transfer of Royal Velvet brand also resulted in the full-year 2012 guidance cut for revenues to $340-$350 million from $370-$385 million. Iconix also slashed its 2012 guidance for earnings to a range of $1.65 - $1.74 per share from $1.77 - $1.84 per share.

Although the company remains positive over the long term with its strong brand portfolio and its continuous efforts to expand in the emerging markets, we expect some near-term challenges for the company. Iconix is currently experiencing a significant slowdown in customer traffic, which has affected its revenues and margins. The overall macroeconomic uncertainty and increased unemployment levels have negatively affected the level of consumer spending for discretionary items. In addition, Iconix remains exposed to unfavorable foreign currency translations and faces severe competition for its brands from various domestic and foreign brands. We, thus, lowered our rating to Underperform from Neutral.