Iconix Brand Group Inc. (ICON) recently completed the acquisition of the sport apparel and footwear brand, Umbro from Nike Inc. (NKE) for a cash consideration of $225 million. The company intends to fund the acquisition with the recently issued Fixed Rate Notes worth $600 million.
Iconix has a proven record of growth through brand acquisitions, joint ventures or partnerships. The addition of Umbro is expected to further strengthen its diversified portfolio.
Iconix completed its fourth international joint venture with Reliance Brands Limited in India during the second quarter of 2012, preceded by joint ventures in China, Europe and Latin America.
Iconix has also entered into two direct-to-retail partnerships in Europe, namely, Material Girl with Auto and Ocean Pacific with U.K.-based SportsDirect. In the coming months, Iconix aims to set up its third direct-to-retail partnership in Europe. As of December 3, 2012, Iconix owns 29 brands that are sold worldwide. Post Umbro acquisition, the company’s athletic brands are expected to contribute around $2.5 billion to overall sales of approximately $13 billion.
On the other hand, by selling off its Umbro brand, Nike intends to reduce costs and focus on its NIKE, Jordan, Converse and Hurley brands. The company previously entered into an agreement to divest its Cole Haan brand to Apax Partners for $570 million. The Cole Haan acquisition is expected to be completed by early 2013.
We believe Iconix’s strategic acquisitions and consistent expansion of licensing agreements will expand its global market share. Iconix is also increasing its penetration in the emerging markets where the middle class population is on the rise and consumer spending is positive. We also expect the new direct-to-retail agreements to boost the company’s top line in the upcoming quarters.
On the other hand, we appreciate better-than-expected first-quarter 2013 results achieved by Nike. However, higher input costs and a shift in mix towards low-margin businesses is hurting the company’s gross margin. In addition, intense competition from peer companies and sluggish spending is expected to weaken the company’s performance in the upcoming quarters.
Iconix Brand Group carries a Zacks #3 Rank (short-term ‘Hold’ rating) while its peer Nike Inc. carries a Zacks #2 Rank (short-term ‘Buy’ rating). Longer-term, we are maintaining our Neutral recommendation on both Iconix Brand Group and Nike Inc.
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