Iconix Pinned at Neutral

Zacks

We are reiterating our Neutral recommendation on Iconix Brand Group (ICON) following its third quarter 2012 results.

Iconix reported third quarter earnings of 41 cents, ahead of the prior-year earnings and the Zacks Consensus Estimate by a penny. Total revenue, however, declined 6.6% to $86.6 million due to decline in Men’s businesses and transition of Royal Velvet brand’s license. However, revenue surpassed the Zacks Consensus Estimate of $81 million.

Overall, Iconix has a diversified portfolio of brands. It builds its brand portfolio by acquiring new brands, entering into joint ventures or other partnerships, each of which enhances the company’s brand management expertise and existing infrastructure. Most recently, Iconix completed its acquisition of the renowned football brand Umbro from Nike, Inc. (NKE) in order to strengthen its brand portfolio.

With this acquisition, the company now comprises 29 consumer brands in the fashion, athletics, electronics, entertainment and home industries. The company remains focused on international expansion and expects many more acquisitions in 2013 with improvement in Men’s businesses.

Iconix has direct-to-retail agreements with several retail giants like Walmart Stores, Inc. (WMT), Target Corp. (TGT), Kohl’s Corp (KSS) and Macy’s Inc. (M). Iconix makes use of the brand name of these retail giants as well as their floor space. In Europe, Iconix launched two direct-to-retail partnerships, Material Girl with Otto and Ocean Pacific with UK-based SportsDirect during the second quarter. Moreover, the long-term agreements and brand exclusivity contracts are incentives to retailers and they make efforts to promote Iconix’s products, which in turn helps to boost the brand’s sales.

Also, the company has been expanding in the emerging markets and has formed four international joint ventures (Iconix China, Iconix Latin America, Iconix Europe and Iconix India) and a 55% owned joint venture (OP Japan).

However, unfavorable currency translations may increase the company’s cost of goods sold, thereby resulting in decreased consumption, gross margins and ultimately earnings. Competition from peers also remains a hurdle.

Currently, Iconix holds a Zacks #3 Rank (short-term Hold rating).

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