Shares of Iconix Brand Group Inc. dropped 23.8 percent Friday as investors digested the fallout following the planned departure of its chief executive officer.
Neil Cole, who founded the company in 2005, said Thursday after the markets closed that he would step down as chairman and ceo. Over 10.1 million shares changed hands compared with a three-month average volume of 881,252. Shares closed at $14.93, and the company now has a market capitalization of $712.7 million.
The news for Iconix got worse. Credit ratings agency Standard & Poor’s on Friday placed the company’s “B+” corporate credit rating on “CreditWatch Negative,” reflecting the management change. “The CreditWatch placement reflects that the sudden shift in management heightens the risk that operating performance will deteriorate because of corporate governance issues and management turnover,” S&P said, noting that it is planning a closer review and assessment of the implications of the leadership change.
Further, S&P said that while the company has indicated that the departures of the firm’s chief operating officer and chief financial officer earlier this year “are unrelated, they nevertheless heighten the risk that operating performance will deteriorate because licensees’ renewals may decline.” The ratings agency noted that changes in management could slow growth over the next one to two years as a new team develops and implements a new strategy.
Wunderlich Securities analyst Eric Beder downgraded the stock to “Hold” from “Buy.” The analyst said he “would be surprised if the company has a new ceo before 2016.” Speculating that the “board asked Mr. Cole to resign,” Beder said “lack of realism and organic growth declines doomed Mr. Cole.”
Beder noted that in 2012, Iconix experienced organic revenue declines driven by maturing brands. Instead of shifting the business model to focus on cash flow, management “resorted to one-time items, joint ventures and asset sales to provide the illusion of organic growth.” He estimated that one-time items contributed 16 percent of 2014 revenue. The downgrade reflects the fact that the “model has become increasingly unsustainable and the architect is now gone.”
Beder also believes that management will have to rebuild credibility with investors. With the top three C-level executives either replaced or gone, there will be “virtually no credibility” to the management near term, he said.
Iconix reports second-quarter results on Monday, and Beder said, “We believe the call will be, at best, a difficult task for management to assure investors that ‘everything is OK,’ and that the business model is intact.” Beder noted that visibility regarding outlook “is now nonexistent and the potential for material changes to guidance and asset valuations has dramatically increased.”
C.L. King’s analyst Steven L. Marotta is maintaining his “Buy” rating for now, but left open the possibility of a change pending a review after the company reports second-quarter results on Monday.
Cole will continue in the role of special adviser through Sept. 30 to assist with the transition. Peter Cuneo, a board member, will serve as chairman and interim ceo. David Jones was named cfo in June. It wasn’t clear which executives would be on the conference call to analysts on Monday, although Jones and Cuneo are the likely participants.
Separately, there is also a lawsuit seeking class-action status pending against the company alleging securities law violations.
Today Iconix has over 35 consumer brands under its umbrella, either through direct ownership of the intellectual property or through investment interests. Total annual retail sales is about $14 billion.