The headaches for Iconix Brand Group are mounting.
On top of an ongoing SEC probe and two shareholder lawsuits alleging securities laws violations and the departure of its top three C-level executives, Iconix on Monday missed its second-quarter estimates by a large margin.
The company — during the conference call to Wall Street analysts on second-quarter results — elected to “reset” guidance to reflect the “current run rate” of its businesses.
The troubles have been adding up at the brand management firm, whose business model relies on acquiring the intellectual property assets of brands which the company then licenses the rights for product categories. Ratings agency Standard & Poor’s now has the company’s “B+” corporate credit rating on “CreditWatch Negative.”
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Last week, as reported, founder Neil Cole — and the company’s long-time chairman and chief executive officer — stepped down. Although Cole is staying on until Sept. 30 to assist in a management transition, his impending departure marks the third C-level executive to leave the company in just a matter of a few months. In March, chief financial officer Jeff Lupinacci resigned. He was followed by the exit of Seth Horowitz in April, who was chief operating officer. At the time, the company maintained that the Lupinacci and Horowitz departures were unrelated to one another.
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In June, David Jones joined the company, succeeding Lupinacci as cfo. Monday’s conference call disclosed that Iconix told Jones about the SEC probe and the topics discussed between the federal agency and the company and sources indicated the SEC discussions began this spring.
Iconix called the discussions part of a “comment letter process,” and said the matter is part of an “ongoing periodic review” of its annual report, or Form 10-K, for the year ended Dec. 31, 2014.
According to the company, the discussions involve the accounting treatment applied to the formation of the firm’s international joint ventures under GAAP, specifically whether the joint ventures should have been consolidated in Iconix’s results. The material terms of the joint ventures have been disclosed in prior filings and have also been audited and reviewed by the company’s auditors. The issue concerns the recognition of gains realized by the formation of the joint ventures: $46.5 million in 2014, $24.6 million in 2013, and $5.6 million in 2012. Should the SEC require that the ventures be consolidated, the profits would have to be reversed and treated as non controlling interests, which would affect the company’s historical financial statements.
The firm has joint ventures in Canada, India and Southeast Asia.
During the analysts’ call, newly named chairman and interim ceo Peter Cuneo said he plans to be an “active interim ceo.” Emphasizing his optimism about the future of the company, Cuneo also said: “I will not be deferring any important decisions until the arrival of the new ceo.” He also told analysts that be believes that the “issues disclosed by the company can and will be resolved.”
Cuneo also said the company was resetting guidance for full-year 2015, with licensing revenue to achieve low-single-digit growth in the range of $410 million to $425 million. “We think that this revised guidance reflects the current run rate of our business and includes some of the weaknesses we’re experiencing in our men’s and home brands. We’ve also adopted a more conservative strategy estimate for our entertainment businesses,” Cuneo said. The company also removed from guidance any potential joint venture consolidation assumptions in the second half of the year. The guidance was specified to relate only to the portfolio of existing brands and does not assume any additional acquisitions, although the company will continue to consider strategic opportunities, Cuneo said. Earlier 2015 projections had been estimated at $490 million to $510 million, as of April.
For the three months ended June 30, net income fell 58.2 percent to $14.8 million, or 30 cents a diluted share, from $35.3 million, or 60 cents, a year ago. Total revenues were down 17.2 percent to $98.5 million from $118.9 million, which included a 0.9 percent gain in licensing revenue to $98.5 million from $97.5 million. Wall Street was expecting adjusted diluted EPS of 45 cents on revenues of $113 million.
Shares of Iconix slipped 2.4 percent to $14.57. Monday’s close reflects a 65.9 percent drop from the close of $42.70 on Aug. 11, 2014.
On Friday Wunderlich Securities Eric Beder downgraded Inconix 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 Iconix began experiencing organic revenue declines driven by maturing brands. He contended that 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.”
Following the second-quarter earnings report, Beder on Monday reduced estimates for fiscal years 2015 and 2016, noting the weak second quarter results and the “materially reduced expectations for the back half of the year.”
He also took issue with management’s stated decision that it was not planning to sell any brands under its portfolio. “We continue to view the company’s brands as having value, but we do not see the need for management to not weed out the weaker players and reinvest the proceeds in more higher returning investments,” Beder wrote.
How the SEC probe and lawsuits will shake out for the company is still unclear.
The company’s cfo said during the call that the company believes the structure of the joint venture transactions should not result in a consolidation, and noted that the potential outcome of the comment letter process is “unknown and may have a material effect on the company’s historical financial statements.” He added that there should not be any impact on historical free cash flow, and will not impact the company’s reported results for the first half of 2015.
One of the lawsuits, filed in June by Gene Niksich in a Manhattan federal court, seeks class-action status and alleges securities law violations between Feb. 20 2013 and April 17, 2015. The lawsuit was filed against Iconix Brand Group and three other individual defendants: Cole; former cfo Warren Clamen and Lupinacci, who succeeded Clamen.
The lawsuit alleges that the “defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations and prospects.” In terms of specificity, the complaint alleged that the company underreported the cost basis of its brands and engaged in irregular accounting practices related to the booking of its joint venture revenues and profit, free-cash flow and organic growth. It also said that as a result of the alleged actions, Iconix’s earnings and revenues were overstated and the statements were false and lacked a reasonable basis.
The Niksich lawsuit was followed a few days later by a similar lawsuit filed by Lorenzo Lazaro. Both lawsuits have been deemed related. There’s been no certification yet of class-action status, and the allegations still have to be proven in court.