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Iconix (ICON) Q3 Earnings Top; Stock Down on Lowered View

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Shares of Iconix Brand Group, Inc. (ICON - Free Report) fell 0.13% on Nov 8 after this clothing brand licensing company reported third-quarter 2016 results. Both earnings and revenues beat the Zacks Consensus Estimate. However, the company slashed its sales guidance while reiterating its expectation for earnings for 2016.

Quarter in Detail

Iconix reported third-quarter adjusted earnings of 19 cents per share, which beat the Zacks Consensus Estimate of 16 cents by 18.75%. Earnings surged approximately 72.7% from the year-ago period, mainly due to higher operating income and improved margins.


Total licensing revenues of $90.9 million marginally beat the Zacks Consensus Estimate of $89.37 million but were flat with the year-ago quarter. In the third quarter of 2016, the company benefited from a $1.6 million favorable impact from foreign currency exchange rates primarily related to the yen.

While the Home and Entertainment category witnessed growth, Womens and Mens declined on a year-over-year basis. The Entertainment segment was up 22% in the reported quarter, driven by strength in the Peanuts brand, as the movie continued to be a success. This, along with tremendous growth in Japan, led to revenue growth. Home segment increased 16%, backed by strength in the Sharper Image, Waverly and Charisma brands. On the other hand, Women’s declined 13% and Men’s fell 14%.

Operating income rose 46% to $40.7 million in the quarter. Operating margin increased 150 basis points to 45%, driven by the men's segment, which had a large write-off of bad debt in the prior-year quarter and fewer special charges in the reported quarter.

Other Financial Update

The company ended the quarter with $239.9 million total cash (including restricted cash of approximately $117.8 million) and $1.35 billion face value of debt.

In Apr 2016, the company closed on a new $300 million senior secured term loan credit facility and the proceeds were used to repay its previously outstanding convertible notes due Jun 2016.

2016 Guidance Lowered

Despite beating estimates, Iconix has lowered its revenue guidance and expects full-year licensing revenue to be $3−$5 million below its previous guidance, at the low end of the $370−$390 million range. The lowered view was due to delayed timing in some new men's programs, macro conditions in Europe, and certain retail assets.

The company has lowered its GAAP earnings guidance by 4 cents to 93 cents to $1.08 per share, due to higher-than-expected fees from a previously disclosed SEC investigation.

Iconix has maintained its full-year adjusted EPS guidance of $1.06−$1.21, but expects it to trend toward the low end of the range. The Zacks Consensus Estimate is pegged at $1.13 per share, within the company’s guidance range.

For the full year, the company expects operating margins to be approximately 48%. It continues to expect free cash flow in a range of $169−$184 million for the year.

ICONIX BRAND GP Price, Consensus and EPS Surprise


ICONIX BRAND GP Price, Consensus and EPS Surprise | ICONIX BRAND GP Quote

Our Take

We are encouraged by the company’s overall business strategy. Iconix is pinning its hopes on its strong brands and expects to continue forming joint ventures to expand its portfolio.

However, we note that Iconix shares have gone downhill since the beginning of this year. Many firms have also filed a class action lawsuit against the company. It has been accused of misleading investors by underreporting the cost of its brands and overstating its earnings and revenues by engaging in irregular accounting practices related to the booking of its joint venture revenues and profits, free-cash flow, and organic growth.

Though the company restated its historical statements along with its fourth-quarter 2015 results, these issues have adversely impacted growth.

On Nov 4, 2016, Iconix received a letter from the Staff of the U.S. Securities and Exchange Commission - Division of Corporate Finance, stating that the Staff has completed its review of the company's Forms 10-K for the years ending Dec 31, 2013 through 2015.

Zacks Rank

Iconix currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the retail/apparel sector are Francesca's Holdings Corporation (FRAN - Free Report) , Steven Madden, Ltd. (SHOO - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) . All these stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1  Rank (Strong Buy) stocks here.

While Francesca's Holdings has an expected long-term earnings growth of 13.75%, Steven Madden and Boot Barn have an expected earnings growth of 13.5% and 14.5%, respectively, for the next three to five years.

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