Cole has built Iconix on a novel, licensing-only business model with guaranteed royalty streams from 15 direct-to-retailer distribution partnerships, with such well-known stores as Wal-Mart, Target, Sears, K-Mart, Kohl's, and Lowes. The attractiveness of this business model, says management, is that it shifts all the cost-risks of inventory, manufacturing, and distributing goods to the licensing partners, which pay Iconix guaranteed royalties of up to 10 percent.
To date, Neil Cole has proven his detractors wrong, as sales increased from $80.7 million in 2006 to $216.8 million in 2008, largely resulting from acquisitions and licensing deals. Nonetheless, this growth has not come cheaply. Cole has spent more than $800 million in the last three years acquiring trademarks of long-lived brands that had fallen on tough times -- with the goal of resuscitating their growth prospects through licensing arrangements and marketing campaigns with leading global retailers. Nonetheless, concerns still linger that Neil's entrepreneurial reach might exceed his managerial grasp.
Iconix's revenues are primarily dependent on the recurring royalty streams from its licensing agreements -- which in most cases provide for guaranteed, minimum payments from its retailing partners (up to $500 million under existing contracts). However, a substantial portion of revenue is concentrated with a limited number of retailers: Target, Wal-Mart, Kohl's, and K-Mart represent approximately 17 percent, 15 percent, seven percent, and five percent, respectively, of total revenue.
Not to rain on the company's successful picnic, but could nimbostratus storm clouds be forming on the horizon? Target's U.S. licenses for Mossimo, Fieldcrest, and Waverly Home-branded products expire in January 2012, July 2010, and January 2011, respectfully; license agreements with discount, retailing powerhouse Wal-Mart for Ocean Pacific and Danskin expire in June 2011 and December 2010; and, Candies and Joe Boxer-branded product categories trademark agreements with Kohl's expire in January 2011 and December 2010, according to a recent common stock prospectus. If these retailers fail to re-up, or negotiate new agreements at less-than favorable terms to Iconix, future revenue and cash flows could be adversely affected.
A read of the company's regulatory filings with the SEC shows that debtors of $328.9 million in asset-backed loans hold liens on trademarks acquired in connection with the debt borrowings. Ergo, violations of debt covenants or debt default would enable the lenders to foreclose on valuable assets such as Mossimo, Candies, Bongo, Joe Boxer, Mudd, and London Fog. Luckily, this debt, however, does not come due until 2012.
Iconix anticipates five percent organic growth for fiscal 2009, although it said in a recent press release that underlying operations will not be strong enough to offset dilution from a recent $153 million stock offering and changes to licensing terms of its Rocawear women's lines. The industry trade group, National Retail Federation, is predicting the all-important holiday retail sales season will record its second consecutive decline this November - December, too, which suggests apparel and retail clients of Iconix are not out of the winter's woods just yet.