Iconix (ICON) Q1 Earnings & Sales Miss Estimates, Stock Down

After delivering positive earnings surprise of 153.3% in the final quarter of 2016, Iconix Brand Group, Inc. (NASDAQ:ICON) posted negative earnings surprise of 8.7% in the first quarter of 2017. Notably, its earnings outpaced the Zacks Consensus Estimate in all the four quarters of 2016 by an average beat of 80%. The company’s top line also lagged our estimates and fell year over year.

Following the dismal performance, shares of this Zacks Rank #3 (Hold) declined 4.3% yesterday during the pre-market trading session. In fact, shares of Iconix have plunged over 28% year to date, underperforming the Zacks categorized Shoes and Retail Apparel industry’s gain of 6.7%. The industry is currently placed at bottom 31% of the Zacks Classified industries (176 out of 256). However, the broader Consumer Discretionary sector is placed at top 50% of the Zacks Classified sectors (8 out of 16).

The company posted adjusted earnings from continuing operations of 21 cents per share that lagged the Zacks Consensus Estimate of 23 cents and also plummeted 55% from 47 cents recorded in the prior-year quarter. This can be attributed to lower revenues and operating income.

On a GAAP basis, Iconix reported earnings from continuing operations of 6 cents per share, down from 29 cents posted in the year-ago period.

Q1 Highlights

Total licensing revenues of $58.7 million lagged the Zacks Consensus Estimate of $88 million by 33.3% and also declined 13% from the year-ago quarter. Revenues decline of nearly 11% in the reported quarter was due to the sale of Sharper Image and Badgley Mischka brands in 2016.

We note that revenues declined 12% to $28.1 million at the Women’s segment, 20% to $10.2 million at the Men’s segment and 8% to $13.1 million at the International segment. However, the same inched up 1% to $7.3 million at the Home segment.

The company’s operating income decreased 27% to $33.6 million in the quarter. Excluding gains on sales of trademarks of $11.0 million and operating income of nearly $1.3 million associated with the Sharper Image brand incurred in the prior-year quarter, the same fell 2% during the quarter. However, adjusted operating margin came in at 57%, up from 52% recorded in the year-ago period.

Other Developments

Concurrent to the earnings release, Iconix has inked a deal with DHX Media Ltd. (NASDAQ:DHXM) to divest its Entertainment business that includes Peanuts and Strawberry Shortcake brands worth $345 million in cash. The transaction is anticipated to conclude by the end of the second quarter this year. These brands were acquired by Iconix for a total cash outlay of $246 million.

In the reported quarter, management has showed the entertainment business’ results as a discontinued operation. In fact, management intends the sale proceeds of the transaction coupled with available cash to pay off its debt by roughly $362 million. This includes a mandatory payment of nearly $152 million of the company's Senior Secured Notes issued under the company's securitization facility, along with the complete extinguishment of the outstanding balance of the Company's Senior Secured Term Loan of $210 million.

Financial Update

The company ended the quarter with roughly $208 million of total cash (including restricted cash of approximately $98.7 million) and $1.2 billion face value of debt.

Following the sale of the entertainment segment, Iconix anticipates a total cash balance of roughly $105 million with a total debt balance of nearly $840 million.

Further, it generated nearly $13 million as free cash flow from continuing operations in the reported quarter, compared with $36 million in the year-ago period.

Outlook

With the sale of the company’s Entertainment business, management expects to strengthen its balance sheet by reducing its debt level. Further, Iconix is likely to focus on its leading brands and in turn improve its performance. Also, it remains on track to boost organic growth to increase its revenues and overall profitability.

Iconix projects full-year licensing revenues in the band of $235–$245 million, down from $350−$365 million guided earlier. The projected range compares with the revenues of roughly $245 million in 2016, excluding revenues of $113 million from the entertainment segment and $9.9 million of revenue from other divested brands that comprise Sharper Image.

Additionally, management reiterated its 2017 adjusted earnings in the band of 70–85 cents. In fact, the Zacks Consensus Estimate is currently pegged at 87 cents per share, above the company’s guidance range. Excluding the expected tax benefit realization of 51 cents per share, adjusted earnings are projected in the range of $1.21–$1.36 for 2017. Iconix updated its GAAP earnings in the band of 29–44 cents for 2017 from 43–58 cents range.

Moreover, Iconix maintained its free cash flow projection in the band of $105–$125 million for 2017.

Stocks that Warrant a Look

Better-ranked stocks in the broader Consumer Discretionary sector include Rocky Brands, Inc. (NASDAQ:RCKY) and PARTY CITY HOLDCO INC. (NYSE:PRTY)

Rocky Brands has increased 24.7% in the past one year and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PARTY CITY HOLDCO carries a Zacks Rank #2 (Buy) and rose 14.9% in the past one year. Also, it has a long-term earnings growth rate of 11.3%.

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