Brean Downgrades Iconix Brand Amid 'Disappointing' Outlook, Restatements

• Iconix Brand Group Inc ICON shares have gained 8 percent in the last one month, rising steeply from a low of $14.42 on October 28.
• Brean Capital’s Liz Pierce downgraded the rating on the company from Buy to Neutral.
• The company’s disappointing preannouncement for 3Q and restatements of historical results are the reasons for the revision in rating, Pierce said.

Iconix Brand reduced its outlook for 3Q and FY15 to reflect charges related to its restatements for 4Q FY13, full-year FY13, each quarter of FY14, full-year FY14 and first half of FY15.

The company preannounced disappointing 3Q results, with total revenue of $89 million significantly short of the Brean estimate of $106 million and consensus expectation of $107 million. Total revenue did not include any generation from the ‘other’ category, as compared to the estimate of $5 million.

The total revenue figure marked a material decline from last year’s $113 million. Analyst Liz Pierce pointed out that excluding the revenue of about $19 million received from the Umbro JV, Iconix Brand’s revenue was down about 5.3 percent y/y.

“Additionally, post a comprehensive review of its license agreements and relationships with its licensees, SG&A will be hit with an additional reserve of $12.2 million or $0.16/share for certain accounts receivables,” Pierce wrote.

Iconix Brand would also be making an adjustment of $3.8 million, or $0.08 per share, in 3Q to Federal tax return related to FY14. The company also incurred an expense of $7.1 million, or $0.10 per share for professional fees and severance, in 3Q.

After the preannouncement, Iconix Brand’s non-GAAP EPS is likely to be about $0.09, while on a GAAP basis, the company expects to report an EPS of ($0.13).

In the report Brean Capital noted that the restatements can be divided into three buckets:

1. The classification of contractually obligated expenses, retail support and other costs as SG&A versus netting such expenses against licensing or other revenue.
2. Inadequate support for revenue recognition relating to certain license agreements.
3. Inadequate estimation of accruals related to retail support for certain license agreements.

Pierce expects Iconix Brand’s shares to be in the “penalty box” until there is more visibility into “Peanuts, resolution with respect to the SEC Staff’s comment letter and overall organic growth prospects for key brands.”