Spring Clean Your Fashion Closet Portfolio
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Iconix Brand Group (NASDAQ: ICON) and Oxford Industries (NYSE: OXM) and Cherokee (NASDAQ: CHKE) are three fashion related companies that should be on your radar. You know their brands and you know the big box retailers and major department stores that sell their clothes. You probably have one or two items of theirs in that closet of yours.
These are the companies that make or license most of what average Americans wear. Should you buy, hold, or toss?
Is Iconix a keeper?
Iconix has an enviable branding business, second only to Walt Disney, licensing over 30 brands such as Candie's, Joe Boxer, Mossimo, Mudd, Lee Cooper, and Ed Hardy. It also licenses more traditional brands: Danskin, London Fog and home accessories names Cannon, Fieldcrest, Waverly, Charisma, Sharper Image, and Royal Velvet. These bring in $13 billion in annual retail sales.
It has been buying brands like Umbro athletic shoes from Nike, Buffalo clothing line, and Lee Cooper, a line of British denim, in a move to expand its international sales to 33% from the current 24%. The company authorized another $300 million share buyback over the next three years.
As an intellectual property licenser and marketer or brand manager, if you will, it has low overhead, only 148 employees. Operating margin is 61.03% and the profit margin is 30.92%. The stock is up 47% over the last year. Its P/E is 17.26%.
However, it has its detractors with a short interest of 14.90%, which grew 37% from March to April. Analysts expect low single digit growth over the next few years significantly underperforming its sector and industry at 13.73% and 13.95% respectively. However, on the Q4 call CEO Neil Cole predicted 20% growth on top and bottom line for 2013 (source Seeking Alpha transcript).
The company reported Q1 earnings on April 24 of a 26% increase of non-GAAP diluted EPS of $0.54 and a 19% increase of revenue at $105.1 million compared to Q1 2012. Guidance was raised to $2.10-$2.20. The good news sent the stock up 5% to a 52 week high of $26.58.
One thing that's rarely mentioned is the company's foray into entertainment and on the Q4 call Cole announced their "Peanuts" movie deal with Blue Sky Studios coming out in 2015. The company is already working on licensees for the tie-in Peanuts merchandise.
Higher end but lower growth
Oxford Industries has four main brands under its fashionable umbrella: Tommy Bahama, Lilly Pulitzer, Ben Sherman, and Lanier Clothes. It licenses the first three brands as well as operating 151 bricks and mortar brand stores. It also runs 14 Tommy Bahama restaurants. The Lanier Clothes division designs and markets men's apparel under licensed trademarks including Kenneth Cole, Geoffrey Beene, Ike Behar, and Dockers. It has a small golfwear division, Oxford Golf.
Oxford Industries is a little more hands on with its lines designing, sourcing, and marketing its brands, just not actually manufacturing. Oxford Industries' brands are aimed at a more affluent, slightly older consumer. Lilly Pulitzer in particular is synonymous with the Palm Beach lifestyle and gained popularity when socialite Lilly Pulitzer's casual wear was worn by former schoolmate and First Lady Jacqueline Kennedy.
The company reported 2012 Q4 and full year results on April 2. Consolidated net sales rose 10% and EPS rose from $2.41 to $2.61 for the full year. CEO Thomas Chubb III noted that its two top brands Lilly Pulitzer and Tommy Bahama performed especially well, with a full year increase of 17% in net sales for Tommy Bahama and 30% increase for Lilly Pulitzer.
The release noted that their mens' clothing line, Ben Sherman, was, as CEO Chubb put it, "extremely disappointing." Mens Wearhouse and Jos A. Bank also reported disappointing sales for less casual menswear last quarter so there seems to be a widespread trend of declining sales for mens dresswear for the end of 2012. This decline was also mentioned by Iconix on their Q4 call.
Oxford Industries has a 31.07 P/E and a yield of 1.30%. It has paid a quarterly dividend since 1960. The PEG at 1.21 indicates it's slightly overvalued here and the stock has run 25.11% over the last year. Its profit and operating margins are underwhelming compared to Iconix, at 3.66% and 8.83% respectively. However, analysts predict a 15.00% growth rate and have a price target of $62.00 for 5% upside.
High yield but low growth
Then there's Cherokee, a much less promising proposition than these other two. Although it has the most reasonable P/E of 15.07 and a 3.10% yield it also has the highest PEG at 7.39. The payout ratio on the yield is a disturbingly high 91.00%.
The company manages, licenses, and markets 30 lifestyle brands much as Iconix does. Its more well-known brands include: All That Jazz, Cherokee, Carole Little, and Saint Tropez-West. Its main retail partners are Target and Home Shopping Network. The company's latest brand acquisition was Liz Lange Maternity and Completely Me by Liz Lange in September 2012. The company also has agreements with big box retailers in India, China, Japan, and Europe.
There are several red flags at Cherokee. Its CFO resigned in February and the company announced it had to delay filing its annual report on form 10-K. The company has only 21 employees.
Its Investor Presentation from March is particularly troubling as it shows a steady downward slide in revenue and EBITDA from FY 2008 through 2012 despite its cheery little orange bubble stating Under New Management in mid-2010. Revenues declined from $42 million to $28 million according to their chart.
This is a very speculative name with almost no analyst coverage (just one analyst) although there is a growth estimate of 2.00% five year EPS growth. In its defense its profit and operating margins at 27.48% and 44.93% are better than Oxford Industries but not as impressive as Iconix.
The Foolish takeaway
Iconix and Oxford Industries are keepers although at 52 week highs for Iconix there may be little upside in the near term. Cherokee is a name to avoid. Like a dress that looks good on the rack with its attractive yield, upon closer inspection this impulse purchase won't fit your portfolio.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!