A partnership started in February between the Umbro brand and Target stores is working out well for the Iconix Brand Group, but the whole company suffered sagging sales and profits in the second quarter.
The U.S. group that holds rights to sports and fashion brands such as Umbro, Ocean Pacific (OP), Danskin, Starter, Pony and several more, saw its sales slump by 17 percent to $50.2 million for the three months.
The Iconix group's turnover was off by 39 percent to $16.9 million in the women's division, due to the transition of retail deals for the Danskin, OP and Mossimo brands. But Umbro supported a sales rise of 5 percent in the men's division to $10.5 million. Umbro-branded fashion apparel for men and women is launching at Target this month and Iconix is working with the retailer to capitalize on the women's football World Cup next year, as well as category expansion.
Another brand with improved prospects is Starter, which is selling on Amazon. Perhaps most promisingly, Starter obtained an agreement to become official on-field outfitter of uniforms and sideline apparel for all teams in the Alliance of American Football League, which is starting play with eight teams in February 2019. Pony inked three licensing agreements in the quarter for footwear, women's and kids' apparel.
The group's international business generated an organic sales increase, albeit from a very small basis. Sales were up by 4 percent for the quarter to $15.8 million and by 15 percent in the first six months of this year, with significant strength across Europe, India and parts of Southeast Asia. The first quarter benefitted from the run-up to Peru's participation in the football World Cup, in Umbro shirts.
Iconix says that its international sales should continue growing for the remainder of the year. This business is driven by six brands, including Umbro, for which Iconix negotiated several long-term renewals in key markets across Latin America, the Middle East and Europe. In China, it struck a partnership with GXG, a men's fashion retailer with more than 2,000 locations.
Excluding one-off items, the Iconix group's adjusted operating income reached $27.7 million in the quarter, down from $37.9 million. In reported terms, it ended up with a net loss of $79.4 million, against earnings of $43.6 million in the year-ago period. This was mostly caused by a non-cash impairment charge of about $73.3 million on the Mossimo trademark, which is winding down at Target this year. As a result, the group recorded a non-cash goodwill impairment charge of $37.8 million in the women's segment.
David Jones, chief financial officer, said in a conference call with analysts that Danskin's adjusted positioning was resonating with licensees. OP obtained a new licensing agreement for footwear and accessories starting in the spring 2019 season, and it gained surf distribution going into the same season, which is helping to reaffirm its surfing heritage.
Iconix said it remained on track with its plans to obtain annual savings of about $12 million through rightsizing of its cost structure. But it has slightly downgraded its guidance for the year, predicting that it will be at the lower end of a sales projection of $190 million to $220 million. The company is forecasting a loss of about $94.4 million to $104.4 million for the year, chiefly due to the Mossimo impairment charge in the second quarter. Its adjusted income should be at the lower end of its forecast of $20 million to $30 million.
The phase-out of several large-scale retail deals was among the motives mentioned by one of its shareholders, Sports Direct International (SDI), as it tried to obtain more influence on the board two months ago.
The British retail group, which controls 8.6 percent of Iconix, issued a notice in June saying that it would nominate four people for the board. In the meantime the two parties have reached an agreement allowing the British sports retailer to appoint two members on the Iconix board.
In its nomination notice, SDI alleged that operational and strategic decisions initiated by Iconix had resulted in “severe value destruction” for its shareholders. The group's share price suffered a stark drop and Iconix is burdened with a substantial debt load relative to sales, it added.
As part of the agreement announced on July 26, Justin Barnes, has been appointed as board member, effective right away. Barnes is a trademark attorney who has long worked with SDI as a consultant and formerly as the group's head of brands. James Marcum, who was already on the board, continues to serve as a Sports Direct representative. Both will serve a term expiring at the group's 2018 shareholders' assembly, and will be nominated for election. As part of the deal, SDI has withdrawn its nomination notice. Iconix will have no more than seven members after the shareholders' meeting.
Iconix said while discussing its quarterly performance that it was close to appointing a new chief executive. The function was previously held by John Haugh, who stepped down as chief executive and board member about two weeks after SDI's notice. Peter Cuneo, the group's chairman, was appointed as interim CEO.
In the meantime, the share price of the Iconix group remains well below $1, which could become an issue for its listing on Nasdaq. The company said that, if needed, it would ask for shareholder approval to reverse split its stock.