Shares of Iconix Brand Group (NASDAQ:ICON) plummeted early last month after the company announced on Nov. 5 that it intended to restate finances for more than the past two years.
The owner, marketer, and licensor of a number of consumer brands including Candie's, Bongo, Rampage, London Fog, Ocean Pacific, and more saw its stock drop by 54%, according to S&P Capital IQ data after that news was made public.
In addition, on Nov. 6, Rosen Law Firm, which focuses on global investor rights, announced its investigation of potential securities claims on behalf of investors in the company and its intention to file a class action lawsuit.
What: Call it bad news following bad news. After Iconix made its actions known, Rosen followed the next day by releasing the news that it will be investigating claims resulting from allegations that Iconix may have issued materially misleading business information to investors.
The company disclosed last month that it intends to restate its previously issued financial statements for a number of periods:
- The fourth quarter and annual results of 2013;
- The 2014 fiscal year and each quarterly period thereof; and
- The first and second quarters of 2015
Iconix is making these changes to correct accounting errors and interim CEO Peter Cuneo, who has only been on the job for 90 days, addressed what is happening during the Nov. 9 earnings call:
Three months ago, when I stepped into the role of interim CEO, the Board, our new CFO and I decided it was very important to conduct a broad in-depth review of the Company's operations. This included our existing license agreements, our relationships with business partners and the Company's overall processes and systems.
The investigation was launched after the Securities and Exchange Commission announced it intended to look into the company's financial reporting. Since the problems occurred, Iconix has changed its CEO, CFO, and COO.
So what: The company announced the findings of a special committee of its board, along with its independent legal and accounting advisors. Problems were uncovered during the review and the company issued a statement to restate earnings for the period in question:
The Company believes that the amount of such adjustments will have no impact on the Company's 2013 income, are estimated to reduce the Company's 2014 operating income by approximately $6.0 million, and are estimated to increase the Company's first half of 2015 operating income by approximately $1.6 million.
It's a pretty big whoops, but Cuneo tried to allay investor fears during the call and in the earnings release by pointing out the Iconix's underlying business is solid. He also noted that the changes did not impact free cash flow.
Now what: Iconix and Cuneo have to pick up the pieces. The lawsuit is a wild card and the company did not comment on it during the call or in the earnings release. The interim CEO, however, did repeatedly express that he was confident about the future.
"We have gone through a difficult transition period, but Iconix continues to have significant business strengths including its diversified portfolio of consumer brands, profitable business model and strong free cash flow generation," he said.
That's a very positive spin, but it is an accurate read on the company's business. Iconix's short-term stock price will likely stay down until investors can regain faith in its reported numbers and perhaps until the lawsuit gets settled,
Ultimately, though, the company's value will be determined by whether it can grow its licensing business. If it can do that, the new executive team should eventually be forgiven for these past problems.