Iconix Brand Group (NASDAQ: ICON ) is one of those great stock finds that are under-followed and under-appreciated. You may not have heard about Iconix, but you probably know its brands Joe Boxer, Mudd, Mossimo, and Umbro. The company has made a variety of acquisitions over the years and built up its portfolio to over 20 brands.
One thing to remember is that Iconix licenses brands, but it does not manufacture the products. This means that it allows other companies to manufacture products that use its brands, which means its margins are great. In fact, Iconix's operating margin is over 60%. This is well above apparel manufacturers like VF Corp, which has a 14% operating margin.
A very broad reach
Iconix has a very broad portfolio of offerings that includes lifestyle wear, evening wear, urban wear, activewear, denim, footwear, outerwear, linens, bed and bath textiles, and team sportswear. Given its brand diversity, the company has remained relatively resilient to broader economic conditions. Iconix managed to grow sales at a 24% compounded annual growth rate over the last five years.
As an added bonus, Iconix's largest customer is one of the most recognized and shopped-at retailers in the world: Wal-Mart (NYSE: WMT ) . Wal-Mart accounts for roughly 17% of Iconix's sales. Target and Kohl's (NYSE: KSS ) are also big Iconix customers, accounting for roughly 7% of sales each. Worth noting is that these are just three of some sixty retail partnerships.
Having Wal-Mart in its corner is a big positive. Iconix's products get put in front of thousands of customers daily. Kohl's is another angle for Iconix products. Whereas Wal-Mart is a discount retailer, Kohl's is a department store. Wal-Mart has one of the strongest store bases on the market, with over 4,000 U.S. stores. It's one of those companies that excels in any environment.
Kohl's should be one of the biggest benefactors from the rise of Gen-Y shoppers (those with birth dates from the early '80s to early 00's). There are 72.5 million members of Gen-Y, compared to 49 million members of Gen-X. The real benefit of this Gen-Y population is that it has showed a greater propensity to buy more clothing while it also prefers discount department stores like Kohl's.
What will drive the stock higher?
The U.S. remains Iconix's largest market, accounting for over 75% of sales. Japan is its second largest market, generating 10% of sales. There still remains a very big opportunity for the company to penetrate the international markets. The company recently, as of the second quarter, broke into the Canadian market via a joint venture with Buffalo International. But the real opportunity lies in emerging markets. Iconix has four major joint ventures in international markets that it hopes will drive sales over the long-term; Iconix China, Iconix Latin America, Iconix India and Iconix Europe.
The company's valuation is also very compelling. Iconix's PEG ratio is a mere 0.64 (anything below a 1 is considered cheap). Its forward price-to-earnings ratio is 12.9, which appears to grossly underestimate the company's growth opportunities. It has enough cash on the balance sheet to cover 23% of its market cap. The company also generated over $2.85 per share in free cash flow over the trailing twelve months.
Foolish bottom line
It's tough to find something wrong with Iconix; it's cheap from a valuation perspective and has a very diverse portfolio of brands. Although the economic and employment outlook has been wishy-washy, a meaningful rebound in the economy will be a big positive for Iconix.
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