Iconix Enjoying Profit, Sales Lift From Recent Buys


Iconix Brand Group ( ICON ) CEO Neil Cole is no stranger to the acquisition game.

Over the years, Cole has built up the company by acquiring well-known consumer brands, 31 in all, from October 2004 to February of this year. Today, Iconix owns 33 brands in the fashion, athletic, electronic, home and entertainment industries, including Candie's, Danskin, London Fog, Mossimo, Fieldcrest, Starter, Ed Hardy, Sharper Image and Joe Boxer.

Some years have held better buying opportunities than others. That's been the case in recent months when Iconix stepped up the pace of deals to the levels last seen in 2007, with the acquisition of three well-known brands since November.

Why now?

"Over the last year, we have obtained over $1.5 billion of availability from the capital markets, which combined with our strong free cash flow of over $200 million has allowed us to successfully execute on both our acquisition and buy-back strategy," Cole told IBD in an email interview. "Our last three acquisitions have been global brands that continue to expand our portfolio internationally."

The biggest deal came in November with the purchase of the Umbro sports apparel and footwear brand and related intellectual property assets fromNike ( NKE ) for $225 million in cash.

The buy brings a lot to the table. Umbro is an "iconic" brand, says Cole, and is the original global soccer brand with 37 licensees in 80 countries.

Athletic Platform

"Umbro further diversifies Iconix into new markets and enhances our athletic platform, which combined with Starter and Danskin represent approximately $2.5 billion in annual retail sales," said Cole. "In addition, we are also getting ready to capitalize on the upcoming World Cup in 2014 and Olympics in 2016 in South America where we have a network of licensees."

Iconix licenses its brands to retailers and manufacturers for use across a range of categories from clothes and accessories to fragrances and shoes. It handles the advertising, promotion and public relations in-house.

Iconix bought another athletic brand, Starter, from Nike in 2007.

In February, Iconix acquired another international brand, Lee Cooper.

Iconix paid $72 million in cash for the global lifestyle brand through its Luxembourg subsidiary. The more than 100 year-old Lee Cooper is a well-known British denim brand, which has expanded into several categories, including women's casual wear and footwear.

Lee Cooper is a licensing business with a group of 35 international licensees. The brand, which is sold in more than 80 countries, represents $500 million in annual global retail sales. With the addition of Lee Cooper, overseas sales are expected to represent roughly 33% of the Iconix's overall business in 2013, Cole said at the time of the buy.

Also in February, Iconix acquired a 51% interest in the Buffalo David Bitton brand from Buffalo International, owned by David Bitton and his brothers. Iconix paid $76.5 million in cash for the interest. To acquire the trademark, Iconix formed a joint venture with Buffalo International, which Iconix will control. The Buffalo brand consists of denim, sportswear, active wear and accessories sold in better department stores, such asMacy's ( M ) and 30 stand-alone retail stores, mainly in Canada, operated by the core licensee.

On an annualized basis, Iconix estimates the brand will generate $25 million in royalty revenue.

Both Buffalo and Lee Cooper have a strong denim heritage, Cole says.

"We are focused on leveraging our broad network of licensees to expand each brand into a complete lifestyle, as well as expand their global footprint," he adds.

It's A Smaller World

Cole says it's a good time to make international buys: "Besides tax advantages, the world is getting smaller with digital and global communications, and we continue to look for brands that can cross borders and benefit from our existing licensee base," he said. "It also gives us the opportunity to leverage their worldwide platforms and expand the global footprint of the rest of our portfolio."

Benchmark Co. analyst Ronald Bookbinder says the Umbro buy is by far the most important of the three deals. He estimates Umbro will generate annual revenue of $40 million to $45 million.

In addition to boasting a "sizable revenue," Umbro has very little exposure in the U.S, where it garners only 3% of its revenue, he says.

Given the growth of soccer as a sport in the U.S., he says, Umbro could be a substantial brand in the U.S. He says Iconix could license the brand to a wholesaler, which would produce the product and sell it to retailers.

Or the brand could be licensed directly by a retailer such asDick's Sporting Goods ( DKS ).

With the licenses Umbro has in Europe, there's a chance it will help Iconix leverage its U.S. brands to more European partners, he adds.

The Umbro brand could help Iconix expand in categories where it's underpenetrated, adds CL King & Associates analyst Steven Marotta.

"Given the brand identity and the halo they occupy in the soccer market, particularly in Europe, they can expand it into a lifestyle brand for apparel and accessories among others," he said.

Iconix, he adds, has the opportunity to continue to grow the brand in Europe and also worldwide.

What's the environment for deals? "We have never been as busy," said Cole. "With the last three acquisitions being internationally focused, we continue to expand our horizon globally, as well as beyond fashion brands. We see growth organically and through acquisition."

After a slowdown in sales and earnings growth in late 2011, Iconix saw a nice upturn in the most recent first quarter. Earnings rose 26% to 54 cents a share, ahead of views. Sales increased 19% to $105.1 million, also topping forecasts.

The recent upturn, says Bookbinder, was mainly driven by the benefits of the three recent acquisitions, increased share repurchases and controlled selling, general and administrative (SG&A) expenses. He estimates the organic growth was flat.

Recent Acquisitions

Iconix is using its balance sheet effectively, adds Marotta . The pickup in acquisition activity and aggressive stock buybacks have been major drivers for earnings, and also the multiple on the stock, he says.

On May 22, Iconix shares hit a new 52-week high.

Bookbinder sees good prospects for more acquisitions, but he says the stock is "fairly valued," which is why on May 16 he downgraded the stock to hold from buy.

Analysts polled by First Call expect full-year earnings to rise 26% to $2.15 a share. They expect a 9% gain in 2014 and a 14% increase in 2015.

Bookbinder says the environment for Iconix's business is "split."

The middle-to-lower income consumer, like theWal-Mart ( WMT ) shopper, is still hurting amid the increase in payroll taxes and higher energy prices. The upper-income consumer is doing better, he adds, and is more confident and feeling more secure.

Look for more buys from Iconix: "Between our free cash flow and strong balance sheet we are extremely well positioned to execute on further acquisitions," said Cole.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: DKS , ICON , M , NKE , WMT

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