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Why Shares of Iconix Brand Group Are Crashing Today

By Timothy Green - Updated Oct 30, 2017 at 12:30PM

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Some royalty revenue will disappear next year, putting the company at risk of violating its debt covenants.

What happened

Shares of brand management company Iconix Brand Group (ICON) tumbled on Monday after it disclosed that Wal-Mart would not be renewing the license for DanskinNow, a line of athletic apparel, beyond January 2019. This development forced the company into discussions with its lenders to avoid being out of compliance with some of its debt covenants. Iconix stock was down about 30% at 11:15 a.m. EDT Monday.

So what

Wal-Mart's decision to no longer carry the DanskinNow brand is expected to reduce royalty revenue for the Danskin brand by $15.5 million in 2018. Iconix was quick to point out that other major retailers, including Lord & Taylor, Costco, and TJMaxx, would continue to carry the Danskin brand. The company plans to relaunch and expand the core Danskin brand in other venues.

A falling graph on top of numbers that could be stock prices.

Image source: Getty Images.

This loss of royalty revenue led Iconix to forecast that it was unlikely to be in compliance with some of its debt covenants next year. Iconix engaged in discussions with its lenders as a result, and has agreed to reduce the size of its credit facility by $75 million to $225 million. Prior to the agreement, $165.7 million of debt was restructured as a delayed draw term loan, which is expected to result in near-term interest savings for the company.

Separately, Iconix announced that its Starter athletic brand was now available on exclusive to Amazon Prime members. This follows the company's previous announcement that the Starter brand was no longer exclusive to Wal-Mart.

Now what

It's never a good thing when a company is forced to make changes to avoid breaking its debt covenants. Losing Wal-Mart as a DanskinNow licensee is a blow to Iconix, which has now seen its stock crash 92% since peaking in 2014.

Iconix is exploring strategic alternatives in addition to actively evaluating capital raising options to repay its debt. Iconix could end up selling off more assets, adding to a list that includes its stake in the Peanuts brand. Investors should learn more about these developments when the company reports its third-quarter results sometime in November.

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