Capital Concerns Intensify For Sequential Brands

Sequential Brands Group Inc SQBG, the parent company of licensed brands such as Martha Stewart and Emeril Lagasse, announced weaker-than-expected third-quarter results Thursday and issued muted 2018 guidance. 

The Analyst

Canaccord Genuity analyst Camilo Lyon issued the downgrade note.

The Rating

Lyon downgraded shares of Sequential Brands from Buy to Hold amid concerns about slowing growth and persisting balance sheet concerns. The analyst also reduced the price target from $6 to $1.50. (See Lyon's track record here.) 

The Thesis

Concerns about the company's capital position have increased, given the decelerating business fundamentals, Lyon said. Sequential is expected to end 2018 with a net debt position of $596 million and a net debt/EBITDA ratio just shy of 6x, according to Canaccord. 

Despite the company's efforts to improve its capital position, the visibility and timing of a comprehensive solution has become clouded, analyst Lyon said. Sequential needs time to work around the problems with its balance sheet — while at the same time focusing on organically growing its key brands, Lyon said.

Sequential's growth potential is limited due to the challenging overall retail environment, the analyst said.

"We acknowledge the heavy lifting the team has done to clean up the business, however, we believe SQBG's outlook over the near term to medium term will remain muted, leading us to move to a Hold rating."

The Price Action

Sequential Brands shares plunged about 39 percent on Thursday in reaction to the Q3 results.

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