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CRT Research | Credit Intensive and

Special Situations
Kevin Starke, CFA
(203) 569-6421 kstarke@crtllc.com
Managing Director
Patrick Marshall, CFA
(203) 569-4373 pmarshall@crtllc.com
Research Associate

Iconix Brand Group Inc

(ICON, NR, PT: None, Close: $16.14)

Company Note

NR - PT: None

Good Grief

November
November
6, 6,
2015
2015

Its hard to know where to start within the ream of bad news that Iconix Brand Group Inc. (ICON, or the
Company) dumped on the market yesterday. Its essence is probably best summarized by saying that accounting
errors and weak business conditions have caused full-year non-GAAP EPS guidance to drop $1.35$1.40 from
$2.00$2.15 (GAAP: $ 1.55$1.60 from $2.24$2.39), and yet theres apparently a view in the market that
these events signal problems that run deeper and could get worse. We don't quite share that view, though the
risks are clearly elevated. In light of today's very likely weakness in the stock, bear in mind that Monday will
bring two very important catalysts: a conference call that could shed light on the accounting issues, as well as
opening weekend box office for the Peanuts Movie.
The accounting restatements that brand management company ICON announced come amidst an ongoing
comment letter process with the SEC and after well publicized resignations of the former CEO and two CFOs.
In early August, the Company had revealed that in process with the SEC, current correspondence relates to
the accounting treatment for the formation of the Company's international joint ventures under U.S. Generally
Accepted Accounting Principles and whether such joint ventures should potentially have been consolidated in the
Company's historical results. This led to the formation of a special committee consisting of independent directors
to review the accounting treatment related to certain of the Company's international joint venture transactions.
It is this committee whose findings led to the proposed restatements listed in yesterdays 8-K filing.
At the time, in August, the Company said, In the past three years, the gains that the Company recognized related
to the formation of joint ventures were approximately $46.5 million in 2014, $24.6 million in 2013, and $5.6
million in 2012. If consolidation of the joint ventures is required, these gains would be reversed and treated as
non-controlling interests. Now it seems that during that process some actual errors in accounting were found
rather than just the mere question of consolidation. The 8-K yesterday made no reference to the outcome of the
discussion on consolidation. The accounting review is ongoing. The Company is saying that further revisions could
come out of it. The market is too.
But whats also bothersome in the preannouncement is the lower guidance on Peanuts. While revenues related
to the brand should grow 20-25%, it seems that Star Wars merchandise is stealing mindshare and shelf space
at retail this upcoming holiday season, and revenues attributable to Snoopy et al. may be $24 million less than
expected. This forms the bulk of the downward revision in 2015 guidance for licensing revenue to a range of $370
million$380 million from $410 million$425 million. Also leading to the revision are currency effects, weakness
in licensing revenues in China and slippage of media revenues into 2016. Yes it is disheartening that some retail
opportunities in 4Q may be lost, but we still feel Peanuts is likely to be a pretty important catalyst for results over
the next 12 months.
The Peanuts Movie opens today in theaters. About it, the New York Times wrote yesterday that Young children
may have a passing acquaintance with the Peanuts gang from the annual holiday television specials and such,
but presumably they arent as thoroughly versed as youngsters of yore who read the comic strip daily and grew
up in a time when the characters were as famous as any in the land. The main story in the film will appeal to them
regardless. Reviews elsewhere were no less gleaming.

Please find important disclosures on page 4 of this report.

CRT Research | Credit Intensive and Special Situations


Iconix Brand Group Inc
November 6, 2015

Iconix Brand Group Inc (ICON, NA, PT:NA)

The accounting review also turned up other odds and ends. The special committee recommended taking a $12.2 million
additional reserve against accounts receivable. No further information was given on the genesis of this. It could be
related to licensees general or specific. The Company should be pressed to disclose more on this. The accounts
receivable reserve will be included in SG&A for 3Q15 and will hurt GAAP EPS by $0.16. In preparing its 2014 tax return, it
was determined that an adjustment of $3.8 million was needed, lowering EPS by $0.08. The Company did not say
which income statement line item was affected by this, but it is presumably the provision for income taxes. The final slug
of costs -- $7.1 million -- relates to the accounting review itself, though Neil Coles severance is also included in that
figure.
Two other changes worth noting are that the Company decided finally to throw in the towel and stop guiding to any
Other Revenue whatsoever, after having markedly guided down on this in the 2Q15 results. This latest move is
prudent, since Other Revenue is by its nature non-recurring and unpredictable. Also, the Company seems set to take
its first-ever impairment charge on one of its brands, with one or more of the menswear brands about to take the hit in
the pending annual review.
The Company intends to present restated financial statements and other financial disclosures in an amended and
restated annual report on Form 10-K for the year ended December 31, 2014 and amended and restated quarterly
reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015. It is worth noting that, as is common in
most bond indentures, there is a timely reporting covenant in the securitization base indenture as well as in the
convertible indentures. Failure to file the 2015 10-K or the restated 2014 10-K and relevant 10-Qs could complicate the
spring refinancing of the 2.5% convertible notes. But bear in mind, the Company said there was to be no change to
historical cash flow information, and neither liquidity nor solvency seem to be in jeopardy.
As we said at the outset, the impact of these accounting issues goes beyond the numbers. But it is still important to look
at what is the true impact on the financial statements in the periods in question. In the table below one can see that the
reductions to revenue are largely matched with corresponding reductions in SG&A.
The 8-K states, These restatements will have no impact on historical cash, free cash flow, or securitized net cash flow
within our securitized financing facility. These restatements include (i) the classification of contractually obligated
expenses, retail support and other costs as selling, general and administrative expenses, as opposed to netting such
expenses against licensing or other revenue, as applicable, (ii) inadequate support for revenue recognition relating to
certain license agreements, and (iii) inadequate estimation of accruals related to retail support for certain license
agreements.
If the $4.4 million negative adjustment to operating income is ultimately found to be the sum total of the changes the
financial statements experience, one would have to admit that the true monetary impact would be fairly muted,
especially when one considers that it is spread over two full fiscal years. The stock was cut in half after hours last night. It
would seem likely to bounce back today, though likely not to the $16+ level it was holding before the news came out. As
of this writing, the levels on the convertible notes were not available to us, but we would expect the 2.5s of 2016 to be a
few points weaker, and the 1.5s of 2018 potentially to be at least five points lower.
To buy the stock after yesterdays news, one would have to regard these developments as cathartic, a house-cleaning of
sorts, and the right first steps to putting ICON back on the right track in terms of managerial oversight over accounting,
as well as better disclosure. We are somewhat inclined to adopt that view, though risk remains elevated at least until
the looming Monday, November 9 full earnings release and conference call, when it is hoped that more information is
forthcoming.

Page 2

CRT Research | Credit Intensive and Special Situations


Iconix Brand Group Inc
November 6, 2015

Iconix Brand Group Inc (ICON, NA, PT:NA)

Summary of Key Income Statement Line Items to Be Restated

Capital Structure
LTM Figures as of
LTM EBITDA
Settlement Date

($ in millions)
Restricted cash
Unrestricted cash
Secured
$100MM Variable Funding Facility due 2043
2012-1 Sr. Secured Notes due 2043
2013-1 Sr. Secured Notes due 2043

6/30/2015
219.8
11/11/2015

Balance
64.9
117.9
182.8

Cum.
Cap.
Face

Net Cap.
Face

LTM
EBITDA
219.8
Mult. (x)

Net
Cum.
Cap.
Face

Net Cap.
Market

LTM
EBITDA
219.8
Mult. (x)

778.9

LTM
EBITDA
219.8
Mult. (x)

100.0
484.5
229.9
814.4

3.7x

631.6

2.9x

814.4

631.6

1,514.4

6.9x

1,331.6

2,293.3

10.4x

2,110.5

Price
-100.0

YTM
(%)

Interest Exp.
Analysis

Mat.

Rate/
Coup.
(%)

Est.
Int. Exp.

100.00
100.00
100.00

4.14% 01/25/43
4.23% 01/25/43
4.35% 01/25/43

4.14%
4.23%
4.35%

4.1
20.5
10.0

96.00
87.00

10.08% 06/01/16
7.66% 03/15/18

2.50%
1.50%

7.5
6.0

Int Exp

48.1

2.9x

288.0
348.0
6.1x

636.0

1,331.6

6.1x

9.6x

778.9

2,110.5

9.6x

Equity
Common Stock (ICON)

Net
Cum.
Cap.
Mkt

Price / YTM
Analysis

(182.8)

300.0
400.0
700.0

Cap.
Mkt

(182.8)

100.0
484.5
229.9
814.4

Senior Unsecured
2.5% Convertible Sr. Sub. Note due 2016
1.5% Convertible Sr. Sub. Note due 2018

Cap.
Face

16.14

48.3 MM Shrs

Source: Company reports; CRT Capital estimates.

Page 3

CRT Research | Credit Intensive and Special Situations


Iconix Brand Group Inc
November 6, 2015

Iconix Brand Group Inc (ICON, NA, PT:NA)


REQUIRED DISCLOSURES
The recommendations and guidance expressed in this research report accurately reflect the personal recommendations and guidance of the research
analyst principally responsible for the preparation of this report
No part of the compensation received by the analyst principally responsible for the preparation of this report was, is or will be directly or indirectly
related to the specific recommendations and guidance expressed in this report. Direct or indirect analyst compensation may be based on performancerelated considerations associated with the recommendations and guidance expressed by the analyst in this report
The research analyst primarily responsible for the preparation of this report received compensation that is based upon CRT Capital Group LLCs total
business revenues, including revenues derived from CRTs investment banking business

Please Note
On April 20, 2015, CRT Capital Group LLC ("CRT") completed its acquisition of the Institutional Equity business of Sterne Agee Group, Inc. (the combined
Institutional Equity businesses, Sterne Agee CRT). As a result, research report publication previously produced separately has been merged into a single
production platform, including the Definitions of Investment Ratings, as of November 01, 2015.
Prior to November 01, 2015 the Legacy CRT Equity Analysts, listed below, assigned ratings based on the following definitions:
**Legacy CRT Platform (prior to November 01, 2015) - Investment Ratings Definitions:
Buy - Expected rate of return on investment at current prices levels is above that rate required, in CRT's view, to undertake the attendant risks perceivedpositive risk/reward investment balance.
Fair Value - Expected rate of return on investment at current prices levels is in line with that rate required, in CRT's view, to undertake the attendant risks
perceived- equitable/reward investment balance.
Sell - Expected rate of return on investment at current prices levels is below that rate required, in CRT's view, to undertake the attendant risks perceivednegative risk/reward investment balance
Legacy CRT Research Analysts:
Shagun Singh Chadha
Robert Coolbrith
Michael Derchin
David Epstein, CFA
Lee Giordano, CFA
Brett Levy
Kirk Ludtke
Kevin Starke, CFA
Amer Tiwana
Lance Vitanza, CFA
Rating and Price Target History
Regarding Research Reports authored by Legacy CRT Research Analysts ONLY:
For disclosure purposes; ratings noted within this reports Rating and Price Target History graph for dates prior to November 01, 2015, only, are reflective
of the **Legacy CRT Platform Investment Ratings Definitions, seen in these disclosures.
Rating

Meaning

Page 4

CRT Research | Credit Intensive and Special Situations


Iconix Brand Group Inc
November 6, 2015

Iconix Brand Group Inc (ICON, NA, PT:NA)


Buy (B)
Neutral (N)
Underperform (UP)

We expect this stock to outperform the industry over the next 12 months.
We expect this stock to perform in line with the industry over the next 12 months.
We expect this stock to underperform the industry over the next 12 months.

Ratings Percentages
As of November 6, 2015

Percentage of Banking Clients Within Each Rating Category


As of November 6, 2015

Buy 56.43%
5.87%
Neutral* 42.42%
4.50%
Underperform 1.15%
0.00%
*FINRA Rule 2711 (H)(5)(A)- Regardless of the rating system that a member employs, a member must disclose in each research report the
percentage of all securities rated by the member to which the member would assign a "buy,""hold/neutral," or "sell" rating. For purposes of
this Rule, Fair Value would be assigned as "hold/neutral".
Valuations are based on estimates using traditional industry methods including, inter alia, analysis of earnings multiples, discounted cash flow calculations
and net asset value assessments. Price targets should be considered in the context of all prior CRT research published in connection with the subject
issuer, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets. Risks that
may impede achievement of the stated price target, if any, include, but are not limited to, broad market and macroeconomic fluctuations and unforeseen
changes in the subject companys fundamentals or business trends.
OTHER DISCLOSURES
This communication is directed at, and for use by, institutional investors only and is not intended for use by retail investors.
This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is published
solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The
securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is based on information obtained
from sources believed to be reliable but is neither guaranteed to be accurate nor intended to be a complete statement or summary of the securities,
markets or developments referred to in the report. Recipients should not use this report as a substitute for the prudent exercise of their own judgment.
Any opinions expressed in this report are subject to change without notice and CRT is under no obligation to update or keep current the information
contained herein. CRT and/or its directors, officers and employees may have or may have had interests or long or short positions in, and may at any time
make purchases and/or sales as principal or agent, or may have acted or may act in the future as market maker in the relevant securities or related financial
instruments discussed in this report. CRT may rely on informational barriers such as Chinese Walls to control the flow of information situated in one or
more areas within CRT into other units, divisions or groups within CRT.
Past performance is not necessarily indicative of future results. Options, derivative products and futures are not suitable for all investors due to the high
degree of risk associated with trading these instruments. Foreign currency rates of exchange may adversely effect the value, price or income of any security
or related instrument described in this report.
CRT accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. CRT specifically prohibits the
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For UK Professional Clients:
This research report is disseminated in the UK by CRT Capital (UK) Limited which is authorized and regulated by the Financial Conduct Authority. This
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2015 CRT Capital Group LLC. All rights Reserved. The Copyright Act of 1976 prohibits the reproduction by photocopy machine or any other means of all
or any portion of this issue except with permission of the publisher. 262 Harbor Drive, Stamford, CT 06902

Page 5

CRT Research | Credit Intensive and Special Situations

Iconix Brand Group Inc (ICON, NA, PT:NA)

Iconix Brand Group Inc


November 6, 2015

William Jump

Dir of Equity Sales, Trading & Research

470.419.6654

Stuart Linde

Director of Equity Research

646.293.6701

Jon Schenk

Director of Equity Sales & Sales Trading

646.205.4952

Kirk Ludtke

Director of Credit Research

203.569.4361

CONSUMER
Auto Parts Retailers
Ali Faghri

| afaghri@sterneageecrt.com

Broadlines / Health & Wellness Retailing


Charles Grom, CFA
| cgrom@sterneageecrt.com
Renato Basanta, CFA
| rbasanta@sterneageecrt.com
John Parke
| jparke@sterneageecrt.com
Consumer Packaged Goods
April Scee
| ascee@sterneageecrt.com

HEALTHCARE
646.293.6744

646.293.6726
646.293.6740
646.293.6738
646.293.6760

Healthcare Services
Brian Wright

| bwright@sterneageecrt.com

Medical Technology
Gregory P. Chodaczek
Caitlin Howard

| gchodaczek@sterneageecrt.com 484.532.5406
| choward@sterneageecrt.com
646.293.6706

Medical Technology
Shagun Singh Chadha

| ssingh@crtllc.com

646.293.6737

203.569.4345

INDUSTRIALS

Discretionary/Retail
Lee J. Giordano, CFA
Michael Gunther

| lgiordano@sterneageecrt.com
| mgunther@sterneageecrt.com

Footwear & Apparel


Sam Poser
Ben Shamsian
Elizabeth Bean

| sposer@sterneageecrt.com
646.293.6748
| bshamsian@sterneageecrt.com 646.293.6747
| ebean@sterneageecrt.com
646.293.6746

Leisure & Entertainment


David Bain
| dbain@sterneageecrt.com

212.915.3163
212.915.3173

949.721.6651

Aerospace & Defense


Peter Arment
Josh W. Sullivan
Asher Carey

| parment@sterneageecrt.com
| jsullivan@sterneageecrt.com
| acarey@sterneageecrt.com

646.293-6732
646.293.6730
646.293.6741

Auto, Auto Parts and Auto Retailers


Michael P. Ward, CFA
| mward@sterneageecrt.com
Ali Faghri
| afaghri@sterneageecrt.com

646.293-6731
646.293.6744

Automotive
Kirk Ludtke

203.569.4361

| kludtke@crtllc.com

Media
Lance Vitanza, CFA

| lvitanza@crtllc.com

203.569.4337

Restaurants
Lynne Collier
Philip May

| lcollier@sterneageecrt.com
| pmay@sterneageecrt.com

214.702.4045
214.702.4004

CREDIT/DISTRESSED & SPECIAL SITUATIONS


Jack Chan
| jchan@crtllc.com
203.569.4351
David Epstein, CFA
| depstein@crtllc.com
203.569.4328
Sean Kiernan
| skiernan@crtllc.com
203.569.4381
Kirk Ludtke
| kludtke@crtllc.com
203.569.4361
Bretty M. Levy
| blevy@crtllc.com
203.569.4336
Kevin Starke, CFA
| kstarke@crtllc.com
203.569.6421
Patrick Marshall, CFA
| pmarshall@crtllc.com
203.569.4373
Amer Tiwana
| atiwana@crtllc.com
203.569.4318
Lance Vitanza, CFA
| lvitanza@crtllc.com
203.569.4337

Coal, Metals & Mining, Engineering & Construction


Michael S. Dudas, CFA | mdudas@sterneageecrt.com
Satyadeep Jain, CFA
| sjain@sterneageecrt.com
Patrick Uotila, CPA
| puotila@sterneageecrt.com

646.293.6749
646.293.6742
646.376.5358

Construction Materials & Diversified Industrials


Todd Vencil, CFA
| tvencil@sterneageecrt.com
Teresa Nguyen, CFA
| tnguyen@sterneageecrt.com

804.729.8025
804.729.8026

Homebuilding
Jay McCanless

| jmccanless@sterneageecrt.com 615.645.7325

Metals & Mining, Coal


Brett M. Levy

| blevy@crtllc.com

Water and Flow Control


Kevin Bennett, CFA
| kbennett@sterneageecrt.com
Ed Riley
| eriley@sterneageecrt.com

203.569.4336
804.729.8024
804.729.8027

TECHNOLOGY
ENERGY
Exploration & Production
Tim Rezvan, CFA
| trezvan@sterneageecrt.com
Oilfield Services & Equipment
Stephen D. Gengaro
| sgengaro@sterneageecrt.com
Ivan Suleiman
| isuleiman@sterneageecrt.com

646.293.6729

Data Networking and Storage


Alex Kurtz
| akurtz@sterneageecrt.com
Amelia Harris
| aharris@sterneageecrt.com

415.762.4881
415.762.4880

646.293.6728
646.293.6727

Interactive Entertainment / Internet


Arvind Bhatia, CFA
| abhatia@sterneageecrt.com
Brett Strauser
| bstrauser@sterneageecrt.com

469.899.3304
469.899.3305

FINANCIAL SERVICES
Banks
Peter J. Winter

| pwinter@sterneageecrt.com

Internet
Robert Coolbrith

| rcoolbrith@crtllc.com

415.762.4890

646.293.6761

Property / Casualty Insurance


Vinay Misquith
| vmisquith@sterneageecrt.com
Vignesh Murali
| vmurali@sterneageecrt.com

212.915.3169
646.293.6735

Specialty/Real Estate Finance


Henry J. Coffey, Jr., CFA | hcoffey@sterneageecrt.com
Jason P. Weaver, CFA
| jweaver@sterneageecrt.com

615.645.7322
615.645.7320

Mobile and Consumer Computing


Rob Cihra
| rcihra@sterneageecrt.com
Edison Yu
| xyu@sterneageecrt.com
Semiconductors
Douglas Freedman
Kevin Chen

646.293.6733
212.915.3172

| dfreedman@sterneageecrt.com 415.762.4887
| kchen@sterneageecrt.com
415.762.4886

TRANSPORTATION, SERVICES & EQUIPMENT


Airlines
Michael Derchin
Adam Hackel

| mderchin@crtllc.com
| ahackel@crtllc.com

203.569.4354
203.569.4378

Page 6