NIKE, Inc. (NKE), PVH Corp (PVH): Should You Invest in Iconix Brand Group Inc (ICON) or Iconic?

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Whether you’re a fan of the following brands or not, you have to admit that many consumers like to rock their Rocawear, Zoo York and DKNY attire. These popular brands are all found under one name: Iconix Brand Group Inc (NASDAQ:ICON). But if you want in, then you’d better buckle up.

Simple and effective strategy

Iconix Brand Group Inc (NASDAQ:ICON) is primarily a brand-recognition company. Therefore, it doesn’t have to worry about retail-store and manufacturing costs. The company’s goal is to acquire popular brands and then market those brands effectively. Since Iconix relies on licensing agreements, it can better predict revenue thanks to minimum royalty expectations. This simple business plan has led to consistent top-line growth and stock appreciation of approximately 109% over the past three years.

Stock buybacks

Iconix Brand Group Inc (NASDAQ:ICON) buys back shares with regularity. It recently announced a $300 million stock-repurchase program to unfold over the next three years, which will help reduce share count and positively impact earnings. However, that doesn’t guarantee stock appreciation.

For example, in the second quarter, licensing and “other” revenue jumped 23% to $115.1 million year-over-year; but if you exclude the acquisitions of Umbro, Buffalo, and Lee Cooper, then licensing revenue was flat.

Beating earnings expectations due to reducing share count via buybacks can work for a while, but for long-term success this must be accompanied by sustainable top-line growth. The good news is that Iconix Brand Group Inc (NASDAQ:ICON) expects both revenue and earnings growth of 20% in 2013. And this is without factoring in additional acquisitions. But expectations aren’t always met.

Brands and the consumer

In addition to the aforementioned brands, Iconix Brand Group Inc (NASDAQ:ICON) also owns Joe Boxer, Mossimo, Ocean Pacific/OP, Starter, and more. However, let’s back up a minute.

NIKE, Inc. (NYSE:NKE) is one of the most well-managed companies in the world, and part of its game plan is to divest under-performing brands. It sold Umbro to Iconix because Umbro was, well … an under-performing brand. Iconix likely feels as though it’s capable of marketing the brand better than Nike. Considering Nike has much greater marketing power, this would be difficult to achieve.

As far as Ocean Pacific goes, you might have worn it in the late 1980’s (if you were around at that time), but it’s not what it used to be. Urban is in; beachwear is out. However, Joe Boxer never seems to fade, and brands like Rocawear and Zoo York remain in demand. Ecko, Ed Hardy, OP, and Starter have weakened as of late.

It should also be noted that Iconix’s brand diversification allows it to target a broad range of consumers, from the value-oriented to high-end shoppers. In order to grow, Iconix aims for joint ventures and acquisitions while focusing on continued brand diversification.

All of this makes sense, but the consumer isn’t likely to get stronger thanks to a payroll tax increase, reduced government spending, high gas prices, and underemployment. In this kind of economic environment, investors might want to consider a safer option.

An iconic brand

The aforementioned NIKE, Inc. (NYSE:NKE) might not be seeing as much growth in the United States as it did in the past, but it has set itself up well in emerging markets. Like Iconix, Nike has a strong history of beating earnings expectations. And like Iconix, it acquires new brands in order to increase market share. Unlike Iconix, Nike didn’t plummet during the market crash of 2008/2009, which is evidenced in the chart below.

ICON Chart

Iconix data by YCharts

The enormous gain for Iconix over the past decade might lead to over-excitement, but don’t go grabbing your party hats and noisemakers just yet. With the consumer stalling, the atmosphere is likely to change.

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