Iconix Brand Group Inc (NASDAQ:ICON) manages 31 diverse brands ranging from luxury Badgley Mischka to value names Mossimo and Fieldcrest linens. It markets across the range of retail from luxury retailer Neiman Marcus to value giant Wal-Mart.
Their business model is unique in its ability to generate free cash flow, revenue, and diluted EPS at seven year CAGRs of 46%, 42%, and 36% respectively. It has a low risk profile unusual to companies involved with apparel and home fashions. Finally, brands it buys are immediately accretive. As an intellectual property licensor and marketer it has low overhead.
How does this model work? It buys a brand license then markets it for retailers who themselves have the responsibility to source, manufacture, design, manage inventory, warehouse, and actually sell the product. As of the end of June Iconix Brand Group Inc (NASDAQ:ICON) took in aggregate guaranteed royalties of $800 million. Thanks to this cash stream analysts project 23% five year EPS growth.
Net profit margin comes in at 36.20% above its historical average of 34.50%. Free cash flow is expected at $203-210 million for 2013 and the company has $441 million in cash.
International is now 33% of the brand portfolio, but the company aims for 40% and brand acquisitions going forward will be international. Iconix Brand Group Inc (NASDAQ:ICON)’ crown jewel is the Peanuts brand accounting for 23% of portfolio revenues. The Peanuts brands has 800 licenses and a full length feature film Peanuts movie in collaboration with Twentieth Century Fox is planned for 2015. This Peanuts movie will likely generate additional revenues for its licenses with cross promotions much like that master of marketing, Walt Disney.
Mickey Mouse vs Snoopy
The Walt Disney Company (NYSE:DIS) has iconic Disney characters, Marvel superheroes, Lucasfilm’s Star Wars, and more under its branding umbrella.The International Licensing Industry Merchandiser’s Association has listed The Walt Disney Company (NYSE:DIS) as number one global licensor for several years running.
But for all that you will pay more with a forward earnings multiple of 15.90. The yield now is a somewhat paltry 1.20%. Operating margin at 21.07% isn’t nearly as impressive as Iconix Brand Group Inc (NASDAQ:ICON)’ nor is the PEG of 1.53.
The Walt Disney Company (NYSE:DIS) has been an outperforming stock as investors realized for the price of the media division (films, Disney network, ESPN, and ABC are responsible for the lion’s share of revenue and operating profit) they got Resorts and Licensing for free. In the third quarter consumer retail segment revenue came in at $775 million and operating income rose 5% credited to higher Merchandise Licensing business.
At the annual shareholder meeting in March CEO Robert Iger had reason to boast, ” In Fiscal 2012, we increased revenue by 3% to a record $42 billion, which led to a record $5.7 billion in net income, up 18% over the year before. And our earnings per share were up 24%, setting a new record of $3.13.”
The second runner up
Well known Calvin Klein and Tommy Hilfiger lifestyle brands generate three quarters of PVH Corp (NYSE:PVH) revenues with heritage brands Izod, Bass, Van Heusen, Speedo, Arrow, and Warners taking up the slack. In 2012 Tommy Hilfiger and Calvin Klein drove global retail sales of $6 billion and $7.6 billion respectively. Global licensing revenues of $180 million are expected for 2013 from Calvin Klein clients such as Coty and G-III.
Operating margin is only 11.79% mainly because PVH Corp (NYSE:PVH) is less an intellectual property brand manager than Iconix and actually operates more as a retailer and designer. However, its ten year CAGR rate of 16% for revenue and over 20% for EPS is solid.
2013 is expected to be an interim year for PVH Corp (NYSE:PVH) as it assimilates Calvin Klein jeanswear and underwear from its purchase of licensee Warnaco. PVH Corp (NYSE:PVH) is viewed as a very solid apparel company but its growth profile is not nearly as exciting as Iconix Brand Group Inc (NASDAQ:ICON)’ despite international expansion and sales growth of 33.60% in the latest quarter. Its PEG of 1.43 reflects the 11.90% five year EPS growth rate analysts expect.
The Foolish takeaway
Iconix has a unique business model. This small cap can be a promising addition to a portfolio with its fat margins and high CAGRs. The Walt Disney Company (NYSE:DIS) is a worthwhile long term addition to any portfolio but buy after a major box office flop on weakness. PVH Corp (NYSE:PVH) is integrating some powerful brands but its business model isn’t nearly as intriguing as Iconix.
The article A “Fat” Brand To Help You Live Large originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney.
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