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Iconix Brand Group (ICON) is a brand management company that licenses, markets, and positions a portfolio of owned consumer brands. In 2010, retail sales of these brands exceeded $12 billion, which places the company, after Walt Disney (DIS - Free Disney Stock Report), as the world’s second largest licensor. All told, Iconix has purchased 12 brands over the past six years, and currently has 27 brands. Excluding equity income, they are generating about $325 million in fees per annum through about 1,400 licenses.

Direct-to-Retail

Direct-to-retail is part of the company’s unique business model. Traditionally, a prospective licensor would purchase a brand, monetize it by licensing to a third-party manufacturer and, in turn, that manufacturer would try to sell to retailers. On the other hand, Iconix licenses its brands directly to retailers, thereby cutting out the intermediaries and creating enhanced profits for both parties.

For example, Wal-Mart (WMT - Free Wal-Mart Stock Report) utilizes its renowned sourcing capabilities to produce goods under Iconix’s Starter (athletic apparel and footwear), Ocean Pacific (a broad range of apparel) and Danskin labels. Augmented by Iconix’s marketing and design input, this arrangement has proven quite successful in recent years. Indeed, revenues generated by these three licensees accounted for 23% of Iconix’s top line in 2009 versus just 3% in 2008. Moreover, these license fees increased meaningfully last year. Taken together, and helped by contributions from recent acquisitions, revenues and share earnings jumped 43% and 20%, respectively in 2010.

Another expanding relationship is with Target (TGT). That discount chain licenses Mossimo (one of the largest apparel and accessory brands in the United States), Fieldcrest (quality bed and bath textiles), and Waverly (home furnishings). Target accounted for 10% of Iconix’s 2009 revenues.  Also, license fees received from Sears Holdings (SHLD), including its Kmart stores, for their sales of the Joe Boxer (underwear, sleepwear), Cannon (home furnishings), and Bongo (casual apparel) brands will likely continue to trend higher for going forward.

Finally, Kohl’s (KSS) has increased selling space lately for Candie’s multi-category lines (footwear, apparel, fragrance, home furnishings). Iconix has granted the retailer the exclusive right to sell Candie’s products through 2016 with options to extend the term. Exclusive and private-label goods account for about half of Kohl’s sales, and they command relatively high markups.

An appealing aspect of Iconix’s operations within the broad retail industry is that its focus is primarily on marketing, ascertaining “trend directions”, and product design, all areas in which it excels. Consequently, it avoids concerns of unsold inventory store-count expansion, and underperforming stores.

Acquisitions

Iconix’s ongoing acquisition program has been a major catalyst behind its revenue and profit growth over the past six years, and this will probably hold true for the foreseeable future. The three largest acquisition expenditures in the three-year period ended December, 2009 were for Danskin (women’s activewear, legwear, dancewear, and fitness equipment), Rocawear (a leading urban lifestyle apparel brand), and Pillowtex (home textiles). Most recently, the company acquired an 80% stake in the extensive Peanuts-related product line for $140 million. In March, 2010, it purchased a 50% interest in MG Icon (the owner of Madonna’s Material Girl brand). Management indicated that the acquisition pipeline remains ample, and the company may well maintain its track record of completing an average of two acquisitions per annum since 2004, for a while. Moreover, its cash flow, estimated at about $140 million in 2011, appears ample enough to support the acquisition program.

Organic Expansion Opportunities

In addition to its ongoing acquisition program, the company has taken numerous steps to generate additional revenue through existing brands and to greatly expand its international business. Currently, the most promising prospects with regard to the former entail Peanuts and MG Icon. Iconix recently signed a sizable five-year contract with ABC Network for the Peanuts Holiday Special. The company also plans to generate additional Peanuts-related fees through the leveraging of its licensing, design, and marketing expertise. Too, the MG Icon line was rolled out through the Macy’s chain just prior to the 2010 holiday season. The brand is in the process of being expanded to include additional apparel and accessory categories, and will be introduced to other retail partners in the United States,  Canada, and Europe.

Also, Iconix has recently established joint ventures in China, Europe, and Latin America, and another in Japan is close to being finalized. The company should generate substantial licensing fees, particularly in China, for London Fog and several of its other brands in 2011.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.