A Resilient Business Model Makes Iconix Worth Watching

Iconix’s licensing-based business model has delivered so far, and the trend should continue in the future.

Apr 11, 2014 at 11:54AM

If you are a fan of a hot clothing brand, chances are that the brand belongs to Iconix Brand (NASDAQ:ICON). Iconix boasts a brand portfolio that's second only to that of Walt Disney in terms of valuation, according to License magazine . Iconix has a simple business model: it acquires brands and then licenses them to licensees throughout the world in exchange for royalties. This eliminates the hassles of managing stores and warehouses as well as the logistic complexities associated with operating distribution and retail chains.

As a pure-play brand-licensing company, Iconix has capital-light operations. Let's take a look at Iconix's underlying business and how it stacks up against peers like PVH (NYSE:PVH) and Perry Ellis (NASDAQ:PERY), both of which also license their brands as a part of their respective operations.

Impressive growth
Iconix posted record fourth-quarter results with 24% year-over-year top-line growth . The company's acquisitions of Umbro, Buffalo, and Lee Cooper primarily fueled this growth. In addition, an emphasis on international expansion, which includes two new international joint ventures in Southeast Asia and Israel, also facilitated top-line growth. On the back of strong top line growth and share repurchases, Iconix's diluted earnings per share climbed 32% year-over-year to $0.54 from $0.41 in the prior-year quarter.

Iconix has inherent business-model advantages as its acquisitions become accretive in no time and it has low overhead costs. As a result, it has led its peers with its strong EBITDA margin even during the period of the Great Recession as the chart below shows:

ICON EBITDA Margin (TTM) Chart

ICON EBITDA Margin (TTM) data by YCharts

Now, Iconix is replacing its outgoing CFO, Warren Clamen, with Jeff Lupinacci. Lupinacci has extensive experience in M&A due diligence, analysis, and negotiation -- so he brings to the table what Iconix needs to get more brands in its portfolio.

Also, in the fourth quarter the company generated $62.9 million of free cash flow, which represented a 66% increase over the $37.9 million generated in the prior-year quarter. Iconix puts its cash to use for acquisitions and share repurchases.

Going forward, Iconix will focus on its three-pronged growth strategy: acquisition of brands, international expansion, and share repurchases. In fiscal 2013, its international business contributed 37% of its sales, up from 24% a year earlier. In addition, its Peanut platform generates two-thirds of its royalty revenue outside of the United States. From 2005 to 2013, Iconix has delivered around 40% compound annual growth on both the top and bottom lines. It expects international expansion and acquisitions to serve as its primary growth drivers going forward.

A look at PVH and Perry
PVH and Perry, on the other hand, differ from Iconix as far as their business models go. Both lag Iconix by a huge distance on EBITDA as the chart above shows. Fool contributor Mark Lin explained that the historical EBITDA margin for Perry Ellis' licensing business has been in the range of 60% to 80%, which significantly exceeds the company's overall 5%-8% EBITDA margin. This stems from the capital-light nature of the licensing business model per se.

In the fourth quarter of fiscal 2014 , Perry registered a decline of 16% year-over-year in revenue. It attributed the decline to macroeconomic headwinds like reduced sales for its private-label and exclusive direct-to-retail brands. Perry was hit by the general weakness in retail sales and this affected its replenishment programs and led to further erosion of the customer base.

Perry has been growing its licensing business aggressively, and this has yielded favorable results. For example, revenue from licensing agreements increased 10% for the full year from $27 million to $29.6 million. In addition, the global branded portfolio showed growth for the year. The combined international wholesale, retail, and licensed businesses account for 12% of the total business. The company expects to build on these initiatives to fuel growth going forward.

PVH has far better positioning than Perry does. Also, PVH managed to beat its own guidance on earnings for the fourth quarter of fiscal 2013 . This primarily resulted from the better-than-expected performances of its Calvin Klein and Tommy Hilfiger businesses, which occurred despite the difficult overall retail environment in the United States. Moreover, PVH's Warnaco acquisition plans remain on track. PVH has also invested in the global growth of its high-margin Calvin Klein brand.

Going forward, PVH is reducing its exposure to off-price and warehouse club sales in North America and Europe. It is also making significant investments in point-of-sale by elevating the presentation and point-of-sale marketing for the Calvin Klein jeans and underwear across the board globally. PVH is also investing in the e-commerce businesses of both Tommy Hilfiger and Calvin Klein to fuel growth. It expects these initiatives to yield top- and bottom-line growth going forward.

Bottom line
Iconix has a strong business model which helps the company generate margins which exceed those of its peers, as we saw in the chart above. This is the reason why Perry Ellis is also pushing this model. PVH also has some elements of the licensing business in its portfolio, but if investors are looking for an out-and-out licensing company they should look at Iconix.

Iconix has a number of strong brands in its portfolio and its business model has proven effective even during tough times, which give investors plenty of reasons to look closely at the stock.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Iconix Brand Group and Walt Disney. The Motley Fool owns shares of Perry Ellis and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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