We are upgrading our recommendation on Iconix Brand Group (ICON - Analyst Report) to Neutral from Underperform, following the solid fiscal 2012 second quarter results.
The second quarter earnings of 45 cents per share beat the Zacks Consensus Estimate by 12.5% as well as the prior-year quarter earnings by 4.7%. Revenues went up 5% primarily driven by strong performance of brands like Mudd, Bongo, Charisma and London Fog, Peanuts. New product launches also benefited revenues.
Moreover, Iconix has a diversified portfolio of brands. It builds its brand portfolio by acquiring new brands, entering into joint ventures or other partnerships, each of which enhances the company’s brand management expertise and existing infrastructure.
Iconix also has direct-to-retail agreements with several retail giants, like Walmart Stores (WMT - Analyst Report) , Target Corp (TGT - Analyst Report) , Kohl’s Corp (KSS - Analyst Report) and Macy’s Inc. (M - Analyst Report) . Iconix makes use of the brand name of these retail giants as well as their floor space. In Europe, Iconix launched two direct-to-retail partnerships, Material Girl with Otto and Ocean Pacific with UK-based SportsDirect, during the second quarter.
Also, the company has been expanding in the emerging markets. Iconix expects to expand its China’s retail partners to 500 by the end of 2012. In the second quarter of 2012, Iconix entered into a joint venture (JV) with Reliance Brands in India. According to the JV, Reliance brands will own the fashion and home brands from the Iconix portfolio in India, including Ed Hardy, Mossimo, London Fog and Ocean Pacific.
However, unfavorable currency translations and competition from peers are matters of concern.
Currently, Iconix, which competes with Guess’ Inc. (GES - Analyst Report) and Hanesbrands Inc. (HBI - Analyst Report) , holds a Zacks #2 Rank, which implies a short-term Buy rating.