Whether you're a fan of the following brands or not, you have to admit that many consumers like to rock their Rocawear, Zoo York and DKNY attire. These popular brands are all found under one name: Iconix Brand (NASDAQ:ICON). But if you want in, then you'd better buckle up.
Simple and effective strategy
Iconix is primarily a brand-recognition company. Therefore, it doesn't have to worry about retail-store and manufacturing costs. The company's goal is to acquire popular brands and then market those brands effectively. Since Iconix relies on licensing agreements, it can better predict revenue thanks to minimum royalty expectations. This simple business plan has led to consistent top-line growth and stock appreciation of approximately 109% over the past three years.
Iconix buys back shares with regularity. It recently announced a $300 million stock-repurchase program to unfold over the next three years, which will help reduce share count and positively impact earnings. However, that doesn't guarantee stock appreciation.
For example, in the second quarter, licensing and "other" revenue jumped 23% to $115.1 million year-over-year; but if you exclude the acquisitions of Umbro, Buffalo, and Lee Cooper, then licensing revenue was flat.
Beating earnings expectations due to reducing share count via buybacks can work for a while, but for long-term success this must be accompanied by sustainable top-line growth. The good news is that Iconix expects both revenue and earnings growth of 20% in 2013. And this is without factoring in additional acquisitions. But expectations aren't always met.
Brands and the consumer
In addition to the aforementioned brands, Iconix also owns Joe Boxer, Mossimo, Ocean Pacific/OP, Starter, and more. However, let's back up a minute.
Nike (NYSE:NKE) is one of the most well-managed companies in the world, and part of its game plan is to divest under-performing brands. It sold Umbro to Iconix because Umbro was, well ... an under-performing brand. Iconix likely feels as though it's capable of marketing the brand better than Nike. Considering Nike has much greater marketing power, this would be difficult to achieve.
As far as Ocean Pacific goes, you might have worn it in the late 1980's (if you were around at that time), but it's not what it used to be. Urban is in; beachwear is out. However, Joe Boxer never seems to fade, and brands like Rocawear and Zoo York remain in demand. Ecko, Ed Hardy, OP, and Starter have weakened as of late.
It should also be noted that Iconix's brand diversification allows it to target a broad range of consumers, from the value-oriented to high-end shoppers. In order to grow, Iconix aims for joint ventures and acquisitions while focusing on continued brand diversification.
All of this makes sense, but the consumer isn't likely to get stronger thanks to a payroll tax increase, reduced government spending, high gas prices, and underemployment. In this kind of economic environment, investors might want to consider a safer option.
An iconic brand
The aforementioned Nike might not be seeing as much growth in the United States as it did in the past, but it has set itself up well in emerging markets. Like Iconix, Nike has a strong history of beating earnings expectations. And like Iconix, it acquires new brands in order to increase market share. Unlike Iconix, Nike didn't plummet during the market crash of 2008/2009, which is evidenced in the chart below.
The enormous gain for Iconix over the past decade might lead to over-excitement, but don't go grabbing your party hats and noisemakers just yet. With the consumer stalling, the atmosphere is likely to change.
Iconix has a market cap of $1.8 billion, making it a much smaller company than Nike, with a market cap of $56.9 billion. In bull markets, investors and traders prefer to invest in smaller companies, since broader market moves carry most stocks higher and smaller-cap stocks move at a more rapid pace.
Looking forward, it would be difficult to imagine a scenario where the broader market continues its upward rampage. Therefore, Nike is likely to be a much safer investment. And it's an investment that you can feel comfortable adding to on signs of weakness.
You might have also noticed Phillips-Van Heusen (NYSE:PVH) in the chart above. PVH owns several popular brands, including Calvin Klein. This was made possible by the company's purchase of Warnaco, which has boosted revenue by almost 50%. PVH also now owns Tommy Hilfiger in addition to IZOD, Bass, DKNY, and more.
Similar to Iconix, PVH has exposure to a broad range of consumers, from mass- market to luxury demographics. That said, PVH is currently trading at 30 times earnings, making it much more expensive than Iconix at 17 times earnings. While PVH is a solid company, if you're choosing between the three, then Nike offers the most safety without sacrificing growth potential.
Iconix has experienced a stellar run since the market bottom of March 2009. If you have never heard of Iconix before, then I'm sorry but you most likely missed it. Due to external economic conditions, not company-specific factors, Iconix is likely to have more downside risk than upside potential at this point in time. Once again, Nike would be a safer bet.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. 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.