The power of marketing makes the best brand names worth billions, and many companies live or die based on the perception of their brands. Iconix Brand Group (NASDAQ:ICON) has turned that fact into a business model, acquiring the rights to popular brand names and then licensing them out to produce immense cash flow.
Yet coming into Wednesday morning's first-quarter financial report, Iconix investors were already concerned about the company's accounting practices and the abrupt resignation of two senior executives, and its financial results left something to be desired for shareholders as well. Let's look more closely at Iconix's latest report, and what the future could hold for the company.
Iconix takes a hit
Iconix Brand Group's first-quarter results didn't look impressive on their face, with revenue falling 15%, to $95.4 million. Most of that decline came because of the one-time revenue from the renewal of its Peanuts licensing deal with ABC last year; but even after making an appropriate adjustment, sales were relatively flat from the year-ago quarter. Net income plunged by nearly a third, to $26.7 million, translating to adjusted earnings of $0.54 per share, down more than a quarter from last year's results, and well short of the $0.68-per-share consensus figure among those following the stock.
Looking more closely at its numbers, Iconix saw revenue declines across the board, but some of its business divisions suffered more than others. The Entertainment segment took the biggest hit, with revenue dropping by about a third. By contrast, the Women's segment declined by only about 3%, outperforming the roughly 10% drops in the Men's and Home divisions.
Helping to boost Iconix's GAAP numbers, the company took full control of its Iconix China joint venture during the quarter. That resulted in a one-time gain of $47.4 million, resulting in an actual rise in earnings on a GAAP basis. Nevertheless, with lumpy results both this year and last, the adjusted numbers give a much better sense of how Iconix has performed on an operating basis.
CEO Neil Cole focused on the company's strategic efforts, pointing to big gains in its international joint ventures around the world and its acquisitions of new brands including PONY and Strawberry Shortcake. In Cole's words, Iconix "remains focused on international, entertainment, and sports as key drivers of our growth," and excitement about the release of a new Peanuts movie later this year is also making some optimistic about the company's future prospects.
What's ahead for Iconix?
On the guidance front, Iconix reiterated its previous projections for the 2015 year, including sales of $490 million to $510 million and adjusted earnings of $3 to $3.15 per share. Given that the company expects to make further acquisitions on a regular basis, those figures could end up getting adjusted to reflect any additional merger activity in the remainder of 2015.
Yet Iconix's latest release remained silent on many of the concerns that have surfaced recently regarding the company. Last month, CFO Jeff Lupinacci resigned after just a single year in the post, with a company filing citing intentions "to pursue another business opportunity" in explaining the move. Then a couple of weeks later, COO Seth Horowitz left his post without further explanation, and Iconix responded only with the assertion that it doesn't intend to replace Horowitz currently, spreading his job duties across other team members instead.
Moreover, questions about the timing and treatment of brand-asset sales remain unanswered. One analyst, who has sold Iconix shares short, gave a detailed explanation of how accounting practices related to assigning cost basis to certain assets could lead to disparities between the treatment of those sales for accounting purposes and their actual economic impact on the company. Without addressing those concerns head-on, Iconix only allows them to grow, spooking long-term shareholders.
Iconix shares initially fell following the earnings announcement but then recovered all their lost ground and were up 1.4% near the end of the trading day. In the long run, how Iconix did during the first quarter will pale in significance to whether something of greater long-term significance is happening behind the scenes at the company. Only time will tell whether fears about Iconix's business will prove correct.