Iconix: Managing Brands at a Discount

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (MagicDiligence) -- Iconix (ICON) is a brand management company.

Currently, the company owns 18 brands outright: Candie's, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific (OP), Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Ed Hardy, and Waverly.

The firm also recently entered an agreement to acquire 100% of the Zoo York brand (currently 51% owned). Additionally, Iconix owns an 80% stake in the Peanuts brand (yes, Snoopy and Charlie Brown -- probably its most valuable asset), and 50% stakes in joint ventures controlling Artful Dodger, Ecko, and Material Girl. This extensive portfolio makes Iconix one of the largest pure brand management firms in existence.

This is a compelling business model. Iconix's operations consist of acquiring brands, signing licensees that want to use the brands, coordinating and ensuring a brand image, and handling marketing for the brands. There are no manufacturing operations -- manufacturing is done by licensees.

This means Iconix has no inventory, extremely low capital requirements, and very little employee overhead. This leads to extreme profitability: The firm's five-year average operating margin is a lofty 67%, one of the highest I've ever seen! Also, most licensee agreements include minimum royalty stipulations, giving Iconix a near-certain baseline of revenue to plan around.

Consumer brands are durable, versatile assets. Most of them have indefinite useful lives. London Fog has been around over 80 years, Cannon for 113 years, and Danskin is over 126 years old! For many, the brand can be extended to multiple merchandise categories. Candie's, for example, is slapped onto shoes, jeans, purses, and even perfumes. Peanuts has over 1,100 licensees, ranging from the MetLife blimp to filmed entertainment to amusement park rides to clothing.

Iconix' primary external growth driver is going to be acquisition of additional brands. Most of the firm's portfolio has been acquired since 2004. Recently, the company expanded its ownership of Ed Hardy to 100%, from a previous 50% stake. Management has been very clear that the firm will continue to be acquisitive and is always on the lookout for new brands to acquire.

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