You Won’t “Lose Your Shirt” With This Apparel Play

Editor’s Note: This article is from the November issue of The Rhino Stock Report, which is now in a free BETA. Click here to sign-up and get the full Rhino Score on this company.

Walk into your nearest clothing store and you’re bound to see one thing… people. Lots of people.

Despite signs of a recession, people are buying more clothes than ever – spending more than $19 billion dollars last month alone (according to the U.S. Census Bureau). So why have apparel stocks fallen an average of almost 30% in the last year?

Well, there are lots of reasons why the apparel industry is a scary place for investors.

For starters you’ve got big time inventory and product risk – the risk that your inventory will become devalued or won’t sell to today’s fashion conscious consumer. You have to worry about your manufacturing facilities overseas. And don’t forget about your supply channel.

Suddenly it’s fairly clear why investors are squeamish when it comes to clothing companies. Small economic changes have prompted big downward price changes in clothing stocks during the last year. My take? That’s Great!

It’s great because I’ve been on the lookout for good value stocks. I see an undervalued industry in apparel and I think there’s a lot of gain-making potential to be had. But I’m not talking about diving headfirst into the menagerie of apparel stocks up for grabs. Investors aren’t stupid and I’ve got the same qualms they do about the industry as a whole.

But there is one apparel company that’s different.

When all of the other clothing giants were working to eek the last bit of efficiency out of their manufacturing processes, this Rhino was busy changing their business plan altogether.

And they made a pretty bold move for a clothing company – they stopped selling clothes.

Crazy? Don’t be so sure… they doubled revenues this year to $160 million and management expects to break $200 million in 2009.

The company: Iconix Brand Group, Inc. (NASDAQ: ICON)

 

A License to Profits

Iconix is unique in that it has reinvented itself as a brand management company, marketing, designing, and licensing clothing brands to some of the biggest retailers in the U.S.

You’re probably familiar with at least some of Iconix’s brands – Candies, Rocawear, Mossimo, and London Fog are a few of their better know labels.

Licensing is where Iconix makes its money; not only does the company avoid dealing with manufacturing and inventory, they also have royalties that are contractually guaranteed by the retailers who carry their lines. That means that around 70% of the company’s 2008 earnings estimates are locked in ahead of time.

Talk about a competitive advantage. Iconix avoids dealing with supply chain headaches while still maintaining a hefty 32% profit margin.

But that’s not the whole story. Iconix’s brand positioning presents a lot of potential for an economy that’s taken its knocks in 2008. The majority of the company’s revenues come from big volume retailers like Target, Wal-Mart, and Sears. If a customer walks into Target to buy a pair of jeans, chances are they’ll be made by Mossimo, a brand exclusively licensed to Target by Iconix.

With the current state of the economy don’t be surprised when people look to places like Target and Wal-Mart for their clothes, leaving high-priced retailers out of the loop.

And new deals are on the way: on July 31, the Iconix penned a new deal with Wal-Mart adding its Starter brand and renewing its DanskinNow license. The company expects its Wal-Mart deal to generate significant growth in the next couple of years.

That’s not to say that all of the company’s brands are sold in big box stores. They also own high-end, high margin labels like Badgley Mischka and Bongo.

High Fashion Stock, Bargain Basement Price

Another of Iconix’s big revenue drivers is going to be found overseas. The company recently entered into a joint venture in China establishing its brands there and will be expanding its reach to Canada and Mexico through Wal-Mart stores in those countries. The organic growth opportunities are phenomenal.

Iconix isn’t without its detractors. The majority of its assets are tied up in intangibles like trademarks. This makes sense for brand management companies like Iconix, but it also makes valuing their assets a whole lot more speculative. Ultimately, I think the company’s ability to generate income is compelling enough to forget about those pesky intangibles.

At its current price of $10.43 per share, ICON is a bargain stock. It’s trading at a low earning multiple and has huge earnings potential. Most analysts agree – they put earnings estimates at $0.29 for the current quarter.

But I’m not most analysts. I’m forecasting earnings of $0.32 per share for the fourth quarter of 2008 bringing along with it a share price of $15.45. Iconix’s unique business model should drive some impressive gains in the next year. For this Rhino, I’m counting on a target price of $18 in the next 12 months. Buy this one up to $11.25.

Note: While the stock price has taken a small dip in recent weeks, this lower price point just makes the argument to buy even stronger. If you want to receive Rhino Alerts for guidance on future movements of ICON, click here to sign-up for the free BETA of The Rhino Stock Report.

Disclosure: The author does not own any shares of Iconix Brand Group at the time of this writing. ICON is a Rhino Stock Report pick. The author is required to disclose any holdings per Growfolio Publishing’s editorial policy.

Tags: apparel, ICON, invest, Rhino Stock, stock