In a sea of numerous consumer companies competing for market share, Sequential Brands (NASDAQ:SQBG), a pure-play brand-management company that owns and licenses eight consumer brands, stands out from its peers. Since the second half of 2011, Sequential Brands has been transforming itself from a traditional wholesaler and retailer of branded apparel into a company solely focused on licensing.
The initial results for the first two years of transition have been impressive. Sequential Brands has quadrupled its number of brands under management from two to eight while increasing the retail sales contribution from brands under management more than 10-fold from under $100 million to approximately a billion dollars.
As Sequential Brands is in the midst of transitioning into a full-fledged brand management company, how should investors assess its future?
What does the future look like?
Foolish investors need not fly blind in evaluating Sequential Brands as it is extremely useful to compare the company to much larger peer Iconix Brand Group (NASDAQ:ICON), the second-largest brand licensor in the world in terms of worldwide licensed-merchandise retail sales, as a basis for comparison.
Iconix Brands is an established brand-management company, with well-known names such as Material Girl, Ocean Pacific, and Peanuts in its portfolio of more than 30 brands. Not only does Iconix Brands manage more brands than Sequential Brands does, it's also more diversified. With a range of brands spread across the luxury, mid-tier, and mass-market segments, Iconix Brands is well-positioned to benefit from consumers trading up and down in varying economic conditions.
Iconix Brands' competitive edge over other apparel distributors and retailers is that it doesn't have to spend monies on sourcing, manufacturing, storage, and distribution, unlike its asset-heavy peers.
The results speak for themselves when it comes to assessing the merits of asset-light brand-licensing businesses like Sequential Brands and Iconix Brands. Iconix Brands has remained profitable and free cash flow positive in every single year of the past decade. It has generated free cash flow margins in excess of 35% over the same period.
As of fiscal 2013, Sequential Brands' operating margin of 25.6% was significantly below Iconix's 60%. This implies room for further margin expansion as Sequential Brands grows and derives economies of scale by spreading marketing, advertising, and corporate office expenses over a larger revenue base. In addition, as Sequential Brands diversifies its brand portfolio across market segments and geographies, it should see greater stability in revenues and earnings.
Future growth drivers
As it looks toward becoming another Iconix Brands , Sequential Brands has plans in place to grow contributions from its brand portfolio across two key dimensions: category and geography.
First , Sequential Brands is expanding into new product categories for its existing brands. For its leading fashion-apparel brand Ellen Tracy, Sequential Brands is adding rugs, bedding sets, and home-decor items to its home-products portfolio in 2014. New additions such as backpacks, headphones, phone cases, and laptop cases will launch under Sequential Brands' action-sports brand Heelys this year.
Second , Sequential Brands is also starting to build its presence outside of North America. For example, it launched its William Rast brand into European countries such as Italy, Germany, Switzerland, and the U.K. this year. This followed William Rast's foray into Canada last year. The fact that a brand like William Rast, which is rooted in American denim heritage and biker culture, can sell abroad bears testimony to the potential of expansion abroad for Sequential Brands' existing brands.
The above has yet to take into account contributions from new brands. Sequential Brands has set a target of two to three new brand acquisitions every year while generating high single-digit organic growth from existing brands through both category and geographic expansion.
Foolish final thoughts
Sequential Brands exhibited strong growth momentum in the first quarter of 2014 as it almost quadrupled its quarterly revenue to $6.3 million and registered a positive adjusted EBITDA of $3.1 million this quarter, compared to a loss in the prior quarter. Assuming that Sequential Brands meets its three-year target of $100 million in revenue and $70 million in EBITDA, it is a potential multi-bagger in the making.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Iconix Brand Group. 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.