Iconix (ICON) Q2 Earnings Beat, Sales In Line, Stock Falls

Shares of Iconix Brand Group, Inc. (NASDAQ:ICON) fell 3.94% on Aug 4 after this clothing brand licensing company reported second-quarter 2016 results. Earnings beat the Zacks Consensus Estimate, while revenues came in line with the same. The company reiterated its sales and earnings guidance for 2016.

Quarter in Detail

Iconix reported second-quarter adjusted earnings of 27 cents per share, which beat the Zacks Consensus Estimate of 23 cents by 17.4%. Earnings declined approximately 37% from the year-ago level, mainly due to a decline in licensing revenues.

Total licensing revenues of $95.7 million were almost in line with the Zacks Consensus Estimate, but declined 2% year over year. The second quarter of 2016 benefitted from a $0.9 million favorable impact from foreign currency exchange rates, primarily related to the yen. Excluding Badgley Mischka licensing revenues and currency impact, revenues for the second quarter were down approximately 1%.

Except the Entertainment category, Womens and Mens declined on a year-over-year basis. The Entertainment segment was up 15% in the second quarter, driven by the strength in the Peanuts brand, where the movie continued to be a success. The Home category remained flat in the quarter.

Operating income declined 8% to $47.8 million in the quarter. Operating margin declined 30 basis points to 50%.

ICONIX BRAND GP Price and Consensus

ICONIX BRAND GP Price and Consensus | ICONIX BRAND GP Quote

Guidance for 2016 Reiterated

The company has increased its 2016 GAAP earnings guidance by 22 cents to reflect an $8.5 million gain related to the repurchase of a portion of its 2018 convertible notes at a discount, a part of which was recognized in the second quarter of 2016 while the other part will be recorded in the third quarter of 2016, and a $10 million gain related to the sale of the company's interest in Complex Media. Cash of $35 million received from the sale of Complex Media is not included in the company's free cash flow guidance.

For 2016, the company continues to expect licensing revenues in a range of $370 million - $390 million, with no expectation of ‘Other revenue’. However, it is trending toward the low end of the range.

Adjusted earnings are expected in a range of $1.06–$1.21 per share. The guidance was lowered on Jun 14 following the issuance of shares, which has in turn increased the company’s outstanding share count. This prompted the company to reduce its earnings guidance for 2016. The Zacks Consensus Estimate is pegged at $1.11 per share, within the company’s guidance range. The company now expects free cash flow in a range of $169 million - $184 million, up from $155 million - $170 million expected previously.

We note that the company’s shares have gone downhill since the beginning of this year. Many firms have also filed a class action lawsuit against Iconix. It has been accused of misleading investors by underreporting the cost of its brands and overstating its earnings and revenues by engaging in irregular accounting practices related to the booking of its joint venture revenues and profits, free-cash flow, and organic growth.

Though the company restated its historical statements along with its fourth quarter 2015 results, these issues have adversely impacted growth. Further, for 2016, the company expects other headwinds like higher expenses, adjustments related to the financial restatement, and transition costs to hamper its profitability.

Nevertheless, the company’s overall business strategy remains strong. Iconix is pinning its hopes on its strong brands and expects to continue forming joint ventures to expand its portfolio.

Iconix currently has a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the shoe and apparel industry include Deckers Outdoor Corp. (NYSE:DECK) , The Children's Place, Inc. (NASDAQ:PLCE) and Wolverine World Wide Inc. (NYSE:WWW) . All of them hold a Zacks Rank #2 (Buy).