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Iconix Brand (ICON) Down to Strong Sell on Near-Term Issues

Zacks Equity Research

On Jan 13, Iconix Brand Group, Inc. ICON was downgraded to a Zacks Rank #5 (Strong Sell), probably due to sluggish sales expectations for full-year 2016. Going by the Zacks model, companies holding a Zacks Rank #5 generally underperform the broader market in the near term. In fact, we caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Why the Downgrade?

Shares of this clothing brand licensing company have been underperforming since the past two years due to near-term headwinds. The stock has significantly declined 69.4% in comparison to the Zacks categorized Shoes & Retail Apparel industry over the same time frame, which showcased growth of 7.9%. While the industry is part of the top 32% of the Zacks Classified industries (84 out of the 265), the broader Consumer Discretionary sector is also placed at bottom 31% of the Zacks Classified sectors (11 out of 16). The stock also exhibits a VGM Score C.

The company also remains skeptical about its full-year performance as it slashed its sales guidance and reiterated its earnings expectation for 2016 during the third quarter 2016 conference call. The lowered view was due to delayed timing in some new men's programs and difficult macro conditions in Europe.

However, we note that Iconix reported better-than-expected third-quarter 2016 results and earnings also surged about 72.7% from the year-ago level, mainly due to higher operating income and improved margins. Currency favorably impacted sales in the quarter. The company also recently sold the rights to the Sharper Image brand and related intellectual property assets to ThreeSixty Group, the brand's largest licensee, for $100 million in cash.

Though the divestment of non-core brands is in line with the company’s focus on managing its portfolio and spending resources on businesses that generate significant volumes, we note that Iconix has delivered overall sluggish results throughout 2015 and in the first nine months of 2016.

The company has been witnessing sluggishness in the women's and men's segments in the last seven consecutive quarters. Also, it expects other headwinds like higher expenses, higher-than-expected fees from SEC investigation, adjustments related to the financial restatement, and transition costs to hamper its profitability.

Estimates of this stock declined over the past 90 days for 2016 and 2017. Moreover, the company anticipates 2016 and 2017 earnings to decline 16.5% and 9.9% on a year-over-year basis.

Iconix Brand Group, Inc. Net Income (TTM)


Iconix Brand Group, Inc. Net Income (TTM) | Iconix Brand Group, Inc. Quote

Stocks to Consider

Some better-ranked stocks in the retail/apparel sector are Francesca's Holdings Corporation FRAN, Caleres, Inc. CAL and Foot Locker, Inc. FL. While Francesca's Holdings sports a Zacks Rank #1 (Strong Buy), Caleres and Foot Locker hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While Francesca's Holdings has an expected long-term earnings growth of 13.75%, Caleres and Foot Locker have an expected earnings growth of 11.0% and 9.7%, respectively, for the next three to five years.

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