Iconix Brand Group – Completed Go-private Transaction &
Restructuring Outlook – 9 September 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Vincent Nesi (VN)
Former EVP at Iconix Brand Group Inc
Agenda:
1. Iconix’s (NASDAQ: ICON) licensing portfolio overview
2. Strategic rationale for go-private transition
3. Opportunities of market dynamic in China
4. Restructuring and brand outlook
Contents
Q: Could you give us an overview of brand management and how the industry has changed or transformed
throughout your time in it?
Q: Could you point out a few trends that really impacted the industry in the past 18 months during
coronavirus, and how they impacted Iconix as well?
Q: What are some of the issues that plagued the company throughout the years and how has management
responded to some of these issues?
4
5
5
Q: From my understanding, it seems like you acquire these companies, these brands, shed the assets and
then push it 100% into the retail channel. This rise of private label has really allowed the retailers to say they
don’t need brands any more. How does that work when you also have an opportunity on a digital front to
push your product through some of these retail or D2C channels, whether it’s going on Amazon or D2C from
a website and outsourcing, keeping the outsourcing aspect to it but having another channel rather than at the
6
mercy of some of these big retailers such as Walmart or Target?
Q: How much can you do on that marketing front when it comes to the branding itself if you don’t have the
ability or have the data to really know what is needed or who your consumer is? How much of a focus is it on
the actual long-term value of the brand?
7
Q: How hard is it to secure some of the licensing deals with the retailers? There a finite number of large
retailers or accounts out there. Why would some of these retailers move forward in the first place?
7
Q: It seems to me this boom-and-bust cycle of some of these brands is nothing new. As you alluded to
earlier, it’s more of a focus on acquiring as many brands as you can. Could you discuss Iconix’s ability to keep
sourcing these deals, working for these new unique brands? How are you assessing what retailers need from
an internal standpoint? It seems like Target or Walmart has everything from a pure product standpoint, but
how are you able to realise which brands they can’t have vs what they could have?
8
Q: How do you think the current go-private transaction helps Iconix to be more competitive with some of its
competitors?
8
Q: You mentioned for Iconix to go out and get some of these brands, it talks to some of these retailers and
has these internal conversations. How does Iconix think about its category management? Is it purely
assessing what the retailers need or, like you said, performance apparel on trend? How is the firm thinking
about some of those bigger, thematic trends within apparel that may not necessarily be popular within
retailers?
9
Q: When assessing the structure of Iconix and some of its competitors, you touched on shedding assets to
make it asset light for expenses vs purposes and for profitability. Have you noticed a structure that makes
sense, that keeps some assets on the balance sheet where it can prove useful at times of high demand? How
does this asset light model perform where you have high demand and you don’t really have control over that
inventory management or that supplier relationship?
9
Q: How does the marketing front fare when the cost of digital marketing has 2-3X and everyone’s going
through the same channels, funnelling money through the same two social media accounts, whether it’s
Facebook, Twitter or Instagram? How crowded is this market?
10
Q: How do some of these marketing hiccups or trends play out internationally when you’re in different
regions and markets such as China, where everyone buys through a certain marketplace? Could you speak to
or elaborate on some of those challenges you were mentioning earlier?
10
Q: When you consider the portfolio of some of these brand management companies, and given the point you
made about competing as a USD 30m company, could you discuss the ability to focus on a few key brands
and expand that marketing budget for brand preservation, new sales channel and long-term growth at the
expense of some margins?
11
Q: Is it better to focus on key categories instead of being spread across fashion, home and athletic? Where
does focusing on high-growth categories fall and what is management’s thinking, or just from other
companies or competitors that are taking a much more strategic focus instead of also spreading themselves
thin?
12
Q: Is it better to pull out of some markets given the international challenges, given that they were successful
before but now it seems like they stalled and money is drying up? Which player within the brand
management market would you say is leading the way where maybe Iconix fails to do so?
12
Q: You talked about asset light model where you’re commanding (? 46.26)
Q: How does the private label aspect apply across categories? It seems like the biggest push from some of
these retailers are in some of those fashion or apparel categories. Could you discuss the categories where
retailers have been reluctant to build a private label presence that brand management companies can
continue to capitalise on, or do you think it will come eventually?
Q: What key factors do you think are overlooked, such as the licensing aspect, that you think investors
should monitor as we come out of coronavirus? As coronavirus persists are you bullish or bearish in the
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industry? This model seems to be a little unsustainable. What are your overall thoughts on the long-term
viability of this model as it is now when it comes to brand management?
14
Iconix Brand Group – Completed Go-private Transaction
& Restructuring Outlook
Transcription begins at 00:00:03 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Iconix Brand Group – Completed Go-private
Transaction & Restructuring Outlook. I’m Nyree Hinton, I’ll be facilitating today’s Interview with Mr Vincent
Nesi, former EVP at Iconix Brand Group.
Vincent, before we start today’s Interview please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
VN: I agree.
NH: Could you start by giving the audience an overview of your background and various roles you’ve held in
the industry?
VN: I think most recently, which is probably most relevant to this call is, I was at Iconix Brand Group. I served
as the EVP there. My responsibilities there were I was on the executive team, the M&A team as well as I
managed about 50% of the branded portfolio from both a licensing business development strategy and
marketing perspective. I left Iconix during all of the transition and I joined Authentic Brands Group where I
held a similar role and then I started my own company with a partner, Icarus Capital Group, which does a lot
of the same things.
[00:01:28]
Q: Could you give us an overview of brand management and how the industry has changed or transformed
throughout your time in it?
VN: Iconix was basically one of the founders of the brand management industry. It was originally buying
distressed brands, where the operating company had found itself in trouble, usually with debt or a transition
or a shift in the marketplace. We would then take the intellectual property, so really an asset purchase for the
IP, and we would transform it from an operating company by shedding the assets or leaving them behind,
generally, into a licensing company. That licensing company would generally try and attack either existing
sales revenues and channels and transform them into licensing through license agreements with operating
partners in those sectors, or with Iconix’s focus at the time, we would do what’s called a direct-to-retail
licensing agreement. We would find a retailer interested in a household name brand and we would give them
an exclusive for a long-term period where they would become, in effect, a licensee for that brand and pay up to
us the license royalty. How it’s evolved since then is there’s a little bit less of a reliance on that direct-to-retail
licensing because it does pigeonhole and create issues sometimes for IP, as you can see with Iconix. There’s
more of a diversification concept where people are buying the intellectual property and they’re then licensing
it to operating partners who are able to reach across a variety of different retail partners and different
geographies and categories vs being stuck in one. I’d say that’s the biggest shift that we’ve seen since Iconix
started and what our original business model is, and where it is today.
Private and confidential 4
[00:03:37]
Q: Could you point out a few trends that really impacted the industry in the past 18 months during
coronavirus, and how they impacted Iconix as well?
VN: I think with any industry what we’ve seen is if you were in trouble before COVID, you got real big trouble
during COVID. There were a few of these brand management companies, especially the public ones, Iconix,
Sequential, who were already haemorrhaging and experiencing a downtrend pre-COVID, and obviously
COVID’s just hurt them that much more. Pre-COVID, what we noticed is, especially with Authentic Brands
Group, one of the barriers for brand management companies is, again, we’re asset light. Our expense
structures are very, very tight, that’s why we’re able to deliver robust EBITDA margins generally in the range
of 50-70%. How we do that is we’ve de-risked or migrated out traditional operating costs such as sourcing,
design, development, personnel overhead, sales, SG&A, expenses and the warehousing, the traditional costs.
What we’ve done is we’ve allowed those to go on to the onus of the licensing partners and that’s what gives us
that ability. One thing we generally stay away from was anything not IP-based, anything not trademark-based.
The biggest no-no there was always inventory and the second was retail stores. E-com always being important,
becoming more important, but retail stores are obviously very cost-intensive and what create a lot of these
brands to go into the distressed markets in general.
What we saw with Authentic Brands Group and their first acquisition pre-COVID in this sector was the
Aeropostale brand and then they followed it up with a number of other large acquisitions, from Brooks
Brothers and Forever 21, is they created a bond or a partnership in their spark group with one of the largest
mall owners in the world, Simon Property. Simon would come in as a partner in the acquisition. They would
assume and take over the existing retail stores and then Authentic would manage the IP side and the licensing
side of the business. That synergy and that symbiosis opened up the floodgates for very, very large acquisitions
that we weren’t able to make before, and again gave us a competitive advantage that we had inherently against
the traditional private equity funds where they were beholden to 6-8 times EBITDA evaluations, because that’s
how they buy things. We were able to buy things more like 8-12 times EBITDA revenue because of our
EBITDA margins and because of how we run the business. Once the brand management companies were able
to go in and start buying up companies that had existing retail and not shutting it down, which means they
didn’t have to buy it out of a process either, the advantage for brand management, you can see it through
Authentic Brands, became incredible. We really noticed that as the biggest, most important shift in trend in
the brand management business pre-COVID and then throughout COVID.
[00:06:58]
Q: What are some of the issues that plagued the company throughout the years and how has management
responded to some of these issues?
VN: Iconix was built on acquisitive growth. We were borrowing money at very, very low rates, we were in 1.5-
2% rates originally, so organic growth was not a big thing there. I don’t think we made more than 3% organic
growth a year on average for eight years straight. We are a very, very strong cash on cash model, so really good
for insurance companies and places that need that cash on cash every year were really our investors. To give
you an idea, with Iconix we set up this acquisitive growth system where we kept buying companies to increase
our revenue. We were public, which is a really, really tough model for the public markets to understand
because they’re looking for 30% growth a year, YoY, and that’s how they base their success of their
investments. That’s not necessarily how this business works. This business is a long-term predictable cash flow
model based on the contracts, the licensing contracts, that we have. That cash comes in a very, very high
EBITDA multiple. From a cash on cash perspective, every quarter we deliver the goods. What we’re not good
at delivering is organic growth on each of those assets we’ve acquired, and we make up for that delta through
acquiring. Once the, I guess, chickens come home to roost and you’ve got to recapitalise your debt or you
become (inaudible 08.41) or there are other issues and you stall, and you saw this with Iconix and you saw it
with Sequential, and you’re not able to acquire more, then you’ve got to completely rely on organic growth
which was the inherent problem in the sector, as it was. That was a big, big issue for Iconix.
Private and confidential 5
The other issue for Iconix was that they relied very heavily, because our original model, like I told you before,
was based on direct retail partnerships. So, for instance, we had about USD 2.5bn of sales going to Target on a
brand called Massimo. Massimo had become a Target brand over years. We hadn’t advertised it properly
outside of the Target universe, so that if there was ever a shift from Target, there really wasn’t a home for it.
When Massimo was pushed out of Target because they decided internally that it had, its lifespan had come to
an end, there was nowhere to turn to replace that revenue. That problem also is very evident in the businesses
we had with Walmart, where we had Starter, Danskin and Ocean Pacific. Again, another USD 2.5bn in annual
sales revenue that generated significant royalty income. Again, same problems, same concept, and once
Walmart said, “We’re done,” there was really nowhere to go with those brands other than restarting them,
which takes significant capital investment which we don’t like doing on marketing. Repositioning the brands
from a mass retail marginalised price point and quality up again, because you have to start up to come down,
and it was the perfect storm. They all fell apart basically at the same time. If one of them goes out, no big deal,
you can figure it, but if that many go out at the same time, the hole in the revenue became too large to avoid.
Again, then our teams came in and they had to impair the assets and the banks became obviously much more
predatory when it came to recapitalising our debt and we were completely frozen on any ability to acquire any
additional assets.
[00:10:46]
Q: From my understanding, it seems like you acquire these companies, these brands, shed the assets and then
push it 100% into the retail channel. This rise of private label has really allowed the retailers to say they don’t
need brands any more. How does that work when you also have an opportunity on a digital front to push your
product through some of these retail or D2C channels, whether it’s going on Amazon or D2C from a website
and outsourcing, keeping the outsourcing aspect to it but having another channel rather than at the mercy of
some of these big retailers such as Walmart or Target?
VN: There are basically two schools of thought. The direct retail relationship, you don’t have the ability as the
brand owner to do any commerce outside of that retailer, so that’s your own e-commerce included. You have
the ability to advertise but again, you’re not able to reach the consumer or gather any consumer data on your
own. On the flip side, which is the more popular method now, is called wholesale licensing and that’s where we
also noticed the trend that e-commerce has become incredibly important, whether through Amazon or direct
to the consumer through the proprietary website. That, these brand management companies are holding close
to their chest and they’re controlling themselves. They’re allowing the licensee partners in their respective
territories or categories or distribution to sell into partner retailers, their categories, whatever they are, and
then they’re benefiting by, we have what’s basically a consignment model where we’re asking these license
partners to hold inventory for us. They may sell it in their own channels but we also sell it through ours. What
happens is, when a consumer buys that product through, let’s say, XYZbrand.com, we pull it from the
licensee’s inventory, we ship it to that customer and we pay the wholesale price or whatever price is agreed on
to the licensee and we reap the benefit of that margin which is much larger, considerably, to a wholesale
percentage of license royalty. What’s happened is we were tired of losing control of our customer and our
brands with a single retailer.
Sometimes it does make sense, and the wholesale model is now really what’s prevailed. The big change, again,
is a lot of the brand management companies are also now acquiring physical retail space in partnership with a
Simon or even on their own. Again, that’s just one more layer, albeit more traditional and cost-intensive to
reach out, touch the customer, gain data and also gain additional sales and margin. Again, this whole model is
based on delivering incredible EBITDA margins because we are asset light, so really the responsibilities of a
brand managing and what really goes into their expenses, and again those expenses shrink as the brand
management company scales up, is marketing, legal and administrative. That’s really the only things these
guys are responsible for. All of the other functions of a traditional brand fall under the license partners. To
answer your question, kind of windedly, sorry, the wholesale model allows for these brand management
companies to control their e-commerce. The traditional model with brand management in e-commerce is
usually done through partnering with a service provider, there are a few very well known out there right now,
where we would allow them to control, to manage the host, the website, control the ROI and the marketing
spend, SEO, SEM, all of those different things. Again, they would feed off the inventory of the licensees, but
Private and confidential 6
we’ve also seen a trend recently where some of the larger brand management companies are starting to build
in-house e-commerce teams to not only control the data better but to reap additional margin points where
they were giving those over to the service providers.
[00:15:02]
Q: How much can you do on that marketing front when it comes to the branding itself if you don’t have the
ability or have the data to really know what is needed or who your consumer is? How much of a focus is it on
the actual long-term value of the brand?
VN: If you look at the life of the contract with the retailer, once that contract is up there’s a pretty hard
depreciation in the asset at the end of that because during the period of that contract, that retailer’s really
taken responsibility, the majority of the responsibility for the marketing, whether it be in-store or on their
website and also had controls on our ability to market on our own website. Again, you’re blind to all customer
data. They’re sharing very, very little, maybe very high level statistics with you on who’s buying the product
and where they live, so you’ve really lost touch not only with the brand but with the customer. Whereas on the
other side with wholesale licensing, you’re in control of it, you’re managing the data, you’re able to disseminate
that data in points to different retail and wholesale partners so that you can build and grow the brand, build
equity, recognise and capitalise on additional opportunities and channels of revenue. I think that’s really been
a lot of the trend is to move away from the exclusive with the retailer. What you’re asking me is, you lose total
visibility and control and what’s happening then is there’s very little spend, very little effort put into some of
those brands over the years as you just start to let go of them to that retail group because it’s such a pain to
deal with them. There’s really not much good you can do and that marginalises the brand so that when that
relationship is over, you’re in trouble.
[00:17:11]
Q: How hard is it to secure some of the licensing deals with the retailers? There a finite number of large
retailers or accounts out there. Why would some of these retailers move forward in the first place?
VN: Mostly the retailers are trying to create draw of consumers into the store. Target, for instance, when we
licensed Umbro to Target, Target knew they had a high index on Hispanic shoppers. Soccer is the number one
participation sport in the world and also in the US, so for them, we sold it to them as, “You’ve got mom or dad
coming in to buy cleats for their child. They’ll also want some activewear for the same child, and while she’s in
there she might buy eggs and milk and herself something.” It wasn’t just selling the brand, it was drawing in
the consumers to buy affiliate products that were surrounding it. It was a very compelling argument for
Target. It was not an easy nut to crack, not only because it checked a lot of those boxes and gave them
additional marketing opportunities, but Target didn’t have the ability to carry Nike, Puma, Adidas, or those
competitive brands. So, by giving them Umbro we gave them albeit a smaller brand but we gave them a true
athletic brand that they could carry and that they could sink their teeth into. There was a real reason for them
to do that deal. Similarly at Walmart, Ocean Pacific was a perfect answer for them in beach brands. Danskin
was a perfect answer for them in that athleisure female look and starter. They, again, can’t carry Nike, Puma
and Adidas at the time so there was a reason for it to exist.
What ends up happening is Target and Walmart and these other retailers put that marquee brand, let’s call it,
next to their private label and they surround it with their private label where they get the real margin. They
begin to marginalise not only the pricing and quality of that marquee brand down towards their private label,
but really eat the lunch of that private label. Once they have enough sales going to their own brand vs the
other, then that brand has served its purpose and there’s really no reason for them to continue on and they
then move on. I don’t want to call them locusts but there is a little bit of a locust mentality to how they do it.
So, that’s really a big driver, is if they can’t carry the tip-top, Levi’s, Nike, whatever you want to call it, some of
these other brands do serve a great purpose but again, their intent is generally, whether they want to admit it
or not, to bolster their private label higher margin business over time until that private label takes over the
Private and confidential 7
floor space completely and they’ve created brand loyalty so they know it as a standalone.
[00:20:09]
Q: It seems to me this boom-and-bust cycle of some of these brands is nothing new. As you alluded to earlier,
it’s more of a focus on acquiring as many brands as you can. Could you discuss Iconix’s ability to keep sourcing
these deals, working for these new unique brands? How are you assessing what retailers need from an internal
standpoint? It seems like Target or Walmart has everything from a pure product standpoint, but how are you
able to realise which brands they can’t have vs what they could have?
VN: There are two major conversations that are always ongoing in our world. One is with the retailer. As we
say in (? 21.02) business, what do you need? What’s missing? I hate the word “white space” but I’m going to
use it. Dick’s Sporting Goods will say to us, “Hey, we need our own, we need a sneaker brand,” or, “We need a
soccer brand,” or “We need this.” The other conversation we have going on constantly is with our licensees, the
major operating companies in the business. If somebody’s got a lot of fashion brands, they might be looking
for either one that’s maybe more premium or more price point than they have, or they may be looking as a
complementary sector of saying, “Hey, we’re very concentrated in fashion. We’d like to add athletic or youth or
female or male.” When we triangulate those conversations, it becomes pretty evident what brands we need to
go after. If Dick’s Sporting Goods says, “I need a sneaker brand for boys,” and we have a conversation similarly
at the same time going on with a sneaker company who makes boys’, we just need to find the brand that we
can stick right in the middle of those two and it becomes pretty easy. Certain sectors are harder right now.
Athletic and outdoor are the toughest currently to find available deals to source because the brands are
running hot so they’re not really looking to sell. What we noticed during COVID is what our hopes were. I
know it’s not nice to say but with COVID coming, we thought there’d be a lot more distressed sellers out there.
The distressed sellers that were willing to sell were distressed when they went in to COVID, so they were in
disaster mode and most of it wasn’t worth it. The sellers that were semi-distressed, that came in relatively
healthy to COVID but got hurt by COVID, said, “You know what? We’re okay, we’re going to just suffer
through this but we know we’re not going to get the value we believe it’s worth and we’re going to try and make
it to the end.” Some of them made it, some of them didn’t. As far as Iconix sourcing brands, we didn’t have any
dry powder or any financing partners to really go out in earnest and acquire anything, so very quickly that
quiet list, who comes out and says, “Hey, I have this for sale,” we became the last call vs the first. Our younger
competitors at the time, Authentic Brands, Bluestar, Marquee, who had the financing behind them and who
were the hot ticket on the street, they were able to jump and capitalise on those sourcing opportunities where
we were sitting on the sidelines. The other thing is, Authentic, I think they run at 14-15 times is what they run
at, EBITDA, value-wise. So, they were also able to go and turn the value model on its head and buy brands at
9, 10, 11, 12 times EBITDA which was unheard of for most private equity funds and (? 23.43) other brand
management funds because they were still, once they put that revenue into their model, they automatically
received that arbitrage from what they were valued at vs what they were buying at.
[00:23:58]
Q: How do you think the current go-private transaction helps Iconix to be more competitive with some of its
competitors?
VN: It’s a really tough model for public markets, as I described before. Again, it’s a very strong cash on cash
model. You get a great return on your investment, it just doesn’t show as much growth YoY unless it’s purely
equative. I think by bringing it private, I think the partners who brought private with them are very well rooted
in IP trademark and again, in the hot sector which is athletic. They’re also a global business so they
understand the rest of the world. I think there’s a huge win for Iconix and for their new acquirer. This model, it
does succeed publicly but really it’s meant for the private markets, so I think that we would have been much
more (inaudible 24.56) but maybe made a little less money. I think now that they are private, they’re going to
have an opportunity without being against a wall each quarter on an EPS basis to really rebuild, reinvest and
Private and confidential 8
allow these brands to re-ripen on the vine vs being slammed against a wall and having to make moves just to
cover certain (? 25.17), so I do think this is a great one for Iconix.
[00:25:26]
Q: You mentioned for Iconix to go out and get some of these brands, it talks to some of these retailers and has
these internal conversations. How does Iconix think about its category management? Is it purely assessing
what the retailers need or, like you said, performance apparel on trend? How is the firm thinking about some
of those bigger, thematic trends within apparel that may not necessarily be popular within retailers?
VN: That’s a real challenge because the retail space is shrinking like crazy. Everyone talks about Amazon but
Amazon is not as easy as they think it is. If you’ve got fashion brands right now that have been beat up and
need a complete revamping, it’s going to be a very long road to getting them back to relevance where you
would attract a retailer to sink their teeth into it, and at the same time without that demand, it’s going to be
very tough to command robust licensing revenue guarantees from any operators out there. I mean, these
people aren’t stupid. They talk to each other as well. We talk to both of them but they’re talking behind our
back and figuring out what’s real and what’s not. Within the fashion sector of Iconix, I think they’re going to
struggle for a while. Within their athletic section, I think they’ve got some real bright spots between Danskin,
Starter, Ocean Pacific, Umbro. Their home section has always been a nice bellwether. It’s not as exciting, it’s
not as shiny and flashy, but it’s a pretty consistent revenue base that has been coming through, steady Eddie,
for many, many years so I think that’s one that gets overlooked. Again, home has been another trend,
especially during COVID, people have been home, they’ve been making improvements, Home Depot’s doing
great, Lowe’s is doing great, Home Goods is doing great, so I think home is one where I think they see a lot of
value there.
Our other division while I was there was the cartoon or animation, entertainment division which was the
Peanuts and Strawberry Shortcake. Again, that was divested so that’s no longer relevant. The final division we
used to look at on our revenue table was basically international. I think one of the places the current brand
management companies suffer terribly and don’t like to admit is they’re not strong international. They have a
lot of trouble figuring out China, Korea, Japan, Europe, Eastern Europe, Latin America. There are so many
different variables and the assumption of just buying an American brand and expecting it to be successful
because it’s American and it’s international is no longer as relevant as it used to be. I think a lot of these brand
management companies are trying, on their 10th iteration, to staff up properly and create the right
infrastructure to grow their brands international because it’s the new frontier. Iconix had a very well-
established, when I was there, we were collecting USD 80m a year in international revenues so the fact that
they’re starting from that strong of a base, to me says that there is a lot of opportunity. Maybe they won’t get
there as quickly domestically with some of these brands, but they’ve also got the hedge bet of the international
partnerships that they’ve forged over the last decade which they’re ahead of the curve on the rest of their
competition, so I think that’s something to be considered as well.
[00:28:50]
Q: When assessing the structure of Iconix and some of its competitors, you touched on shedding assets to
make it asset light for expenses vs purposes and for profitability. Have you noticed a structure that makes
sense, that keeps some assets on the balance sheet where it can prove useful at times of high demand? How
does this asset light model perform where you have high demand and you don’t really have control over that
inventory management or that supplier relationship?
VN: There are (? 29.30) controls. As a licensor, you have the absolutely sole discretion on proving (audio
distorts 29.41) and pricing and who it’s distributed to, if you care to. You (audio distorts 29.48) these license
operators work for you and pay you to work for you. It’s much more valuable in the brand management world
to not have all of those assets. I mean, assets (audio distorts 30.05). I guess, if you’re looking at network and
capital it’s assets, but to have them take the risk from designing a product to shipping, selling, the returns, to
Private and confidential 9
the rest of it, and to collect a percentage of that revenue, it’s completely de-risked. With the control levers of
quality, pricing, distribution, etc, it’s really having your cake and eating it too. I don’t think there’s anything
wrong with the fundamentals of the asset light, and when I say asset light I just mean basically licensing
model. There are some improvements that have been made where we grab back, as you mentioned before, the
e-commerce rights. We used to give them to the licensees, now they’re through the (audio distorts 30.47)
brand management players are holding them in-house now.
So, there you’re able to realise additional gross margin on selling at retail vs collecting a percentage of
wholesale, but there’s nothing wrong with the asset light model. I think it’s really also a responsibility issue. If
you look at ABG, Authentic Brands Group, they’ve dumped a ton of money into their (audio distorts 31.13)
teams who handle all, there’s over half a billion over the various social media for all of their brands. They put a
ton of resource behind marketing and taking care and being the custodians of those brands globally. It really
shows. Those brands are still just as relevant, most of them, as the day they bought them. I think at Iconix, we
did not do as good a job as that, again, because our fundamental premise was mostly handing over our brands
to a (audio distorts 31.45), but I think you see now, a lot of these folks are really spending and really investing
the brands and the marketing in (audio distorts 31.54) through digital and traditional media. I think Iconix,
for a long, long time, was not able to do that and lost sight of it so when there was an issue with these brands,
they were more (audio distorts 32.08) because (audio distorts 32.11) longer.
[00:32:17]
Q: How does the marketing front fare when the cost of digital marketing has 2-3X and everyone’s going
through the same channels, funnelling money through the same two social media accounts, whether it’s
Facebook, Twitter or Instagram? How crowded is this market?
VN: There are different (? 32.41). Some we look at, take a Brooks Brothers, for instance. Yes, a digital
campaign is very important for attracting younger consumers to Brooks Brothers but if you look at the
traditional Brooks Brothers consumer, they’re still reading and involved in traditional media. So, one of the
issues we had at Iconix was we had a very single-minded marketing team. That’s not a disparaging remark, it’s
the truth. Very tough to have a single team who goes out and markets Umbro soccer team in Manchester one
weekend, and the next weekend is at Fashion Week in New York City doing fashion, and the next weekend is at
a home goods show. They all have different needs, digital or non-digital, so I think one of the evolutions,
hopefully, for them is that they’ll have enough bandwidth and diversity within their marketing group to handle
all of the different pockets of brand and brand audiences. That’s been a big problem.
The other thing on the digital front is, really the biggest strategy, I think, for everyone, other than having a
beautiful website that becomes an ecosystem for stickiness of that consumer and keeping them engaged, is
that the reason consumers go to a website is to buy stuff. So, our (audio distorts 33.56) Iconix because we
weren’t selling anything on them were not sticky at all. There’s no reason to go on a website generally for a
brand if they’re not selling something and you’re not finding new products or a deal or something like that.
Where everyone’s investing their money now, other than that ecosystem, is on influencers because the
difference is with influencers, influencers are very specific to a target audience. If you’re selling young girls
cosmetics and lip gloss, you’re going to get whoever their hero is and then the next tier of that hero and
downwards to represent those products and engage those consumers across multi platforms of social media.
Whereas if you’re just throwing, I don’t want to say throwing darts but just SEO and traditional retargeting is
still very important but the influencer strategy has risen to the top for sure, even a few years ago, to be the
most effective and most convertible engagement of a consumer to buy a product.
[00:34:57]
Q: How do some of these marketing hiccups or trends play out internationally when you’re in different regions
and markets such as China, where everyone buys through a certain marketplace? Could you speak to or
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elaborate on some of those challenges you were mentioning earlier?
VN: One of the problems is not a lot of these brand management companies have the money to invest across
multiple international markets, so most, the majority, I’d say more than 80-85% of their annual budgets are
directed towards America and that’s always been an issue and a fight. When you look at different markets,
they market different, they sell different ways, so China right now is very much Tmall, JD. They still have
(audio distorts 35.44) on retail stores. China is interesting because the Government basically helps fund
different companies owning a number of retail stores across the major malls and cities because it creates jobs
and it’s a way to deploy capital and keep their (audio distorts 36.00). Obviously people haven’t been in stores
very much recently so there’s been a shift towards the digital side, towards Tmall and those guys but if you go
back even three years, the biggest players in China retail for a consumer were all in stores. New Balance had
1,000 stores, now New Balance is closing stores and they’re deploying their capital into digital so that they can
build their Tmall store.
Similarly in Korea, Korea had beautiful stores but really right now the Korea business has shifted, unbelievably
so, to less of the digital website and more actually for home shopping. We look down a little bit on home
shopping here in America but if you go to Korea, you can buy bubblegum and Bentley convertibles on the same
home shopping network. That’s become the dominant there so again we’re shifting to who is selling, who’s
standing on that stage and selling for that half an hour your products that represents you? It ties into a greater
strategy which is obviously different than in China (? 37.03) you get in a certain social or price (? 37.06)
services that will lead someone to your product on Tmall. There are these nuances between these markets that
are phenomenal but I will say that every brand management company doesn’t have the capital behind it to
deploy to servicing these markets in the proper way, and that’s across the board.
If you think about it, if you have a company doing USD 30m in footwear and they spend 10% of their revenue,
and it’s an operating company, on marketing they’re spending USD 3m. In Iconix’s model, if Umbro is doing
USD 300m in sales through a licensee and they’re receiving 10% royalty, they’re getting USD 30m in royalty. If
they spend 10% of that on marketing, they’re spending the exact same thing. So, basically, you’ve cut your,
losing the gross margin but de-risking it, you’re basically competing as a USD 300m company with the same
budget as a USD 30m company. That really hinders our ability to be able to deploy all of these different
markets’ additional marketing spend. We have a Nike that are spending USD 3bn on marketing. It’s really,
really tough to compete. That’s the one chink in the armour with brand management, is that your ability to
leverage and to really invest when it’s hurting the cash on cash returns and the expectations of the investors
and the promises, marketing suffers the greatest, especially when you go overseas. That’s something that’s
going to have to be attacked over the next few years.
[00:38:47]
Q: When you consider the portfolio of some of these brand management companies, and given the point you
made about competing as a USD 30m company, could you discuss the ability to focus on a few key brands and
expand that marketing budget for brand preservation, new sales channel and long-term growth at the expense
of some margins?
VN: At this point, again, they are definitely going to focus on a few key (? 39.25) they’ve got that are relevant.
There are some in the portfolio that I think anyone will admit are not, I don’t want to say not salvageable but
just not going to move the needle. Where they generally will focus is, there still are some very successful
brands there. On the fashion side, if you want me to talk to Iconix, Buffalo continues to be a very, very strong
brand so there’ll be big focus there. Marketing structure there is based on the customer, the customer basically
lives in the average department store, so Macy’s, Dillard’s, those types of places so that’s where the folk will be.
That kicks off some really good royalty, so again, that will be a big, big, big focus for Iconix. (? 40.11) is another
one where it skirts the athleisure and athletic in the female world. It’s come out of, now, Walmart but that one
still had some life outside of that, so I think you’ll see a lot of focus there. Starter is one where I think they
believe they can compete and reboot that. A partnership there that would make it special is attacking athletes.
They don’t have the budget and won’t have the budget to attack the athletes you see on prime time TV but this
is somewhere where they’re going to have to go down a few steps, maybe NCAA athletes or maybe the Junior
Private and confidential 11
Tour in tennis or places like that. I think that’s going to be another very focused piece for them on deploying
resources.
Finally, the last one is Umbro. Again, Umbro’s tricky. We couldn’t compete with Puma, Nike, Adidas and those
guys, they just have too big a budget. So, we weren’t able to really sponsor those premier league teams and
World Cup teams as much as we were so, again, the focus becomes more regional and more, I guess, smaller
and local. Again, there’s nothing wrong with that type of marketing but a lot of the brands are going to suffer
just because they’ve got to choose their battles. I think they’re doing a good job of that and saying, “Here’s the
five brands that we need to focus on, that will give us the most revenue to get back to where we are.” Hopefully
that has a sailing and a drag effect on bringing some of these other assets with them. Whichever assets don’t
make the cut, now they have the choice to say, “We can sell them off or we can shut them down, where before
we were beholden to the net asset value of this IP in our portfolio. It was all collateralised against our loans.”
Now they can impair these assets and sell them off for whatever they want to move them and maybe take that
capital, redeploy it into investing in the existing successful brands or possibly acquiring new brands, but that’s
a big handcuff with public companies. We were always very careful to not create an impairment to our assets
on the balance sheet, so we had to hold them and do the best we could (audio distorts 42.21) putting them
either towards the successful brands or otherwise.
[00:42:27]
Q: Is it better to focus on key categories instead of being spread across fashion, home and athletic? Where
does focusing on high-growth categories fall and what is management’s thinking, or just from other companies
or competitors that are taking a much more strategic focus instead of also spreading themselves thin?
VN: From a marketing aspect, it’s tricky to have too diverse of a deployment of assets across multiple places,
ie, into athletic, into fashion, into home. No, it’s very commonplace to have a diverse portfolio, not overly
diverse. I think Iconix has been very good at focusing in on consumer products that are generally wearables
and lifestyle. We no longer have Sharper Image. There’s no stretches here. (Audio distorts 43.25) say that they
have a fashion bucket, an athwear bucket and a home goods bucket, and those three buckets should be very
manageable for them. (Inaudible 43.36) can have similar discussions with the key heads of certain retail
groups to deploy all of (inaudible 43.43) that if the Macys of the world are (audio distorts 43.47) they can focus
on (audio distorts 43.49). I think the other thing is just, again, they have a developed international business
here so that gives them an extra edge over a lot of the competition to continue finding growth. United States
retail is compressing, I’m not saying it’s not compressing overseas but at least there’s additional doors in place
to put product overseas with a developed network. (? 44.14), I think having a fashion, an active and a home
bucket, one, two, three, is not overstretching them by any means.
[00:44:28]
Q: Is it better to pull out of some markets given the international challenges, given that they were successful
before but now it seems like they stalled and money is drying up? Which player within the brand management
market would you say is leading the way where maybe Iconix fails to do so?
VN: Authentic Brands Group is number one.
NH: Could you expand on some of those qualities that you think they’re doing well in vs not?
VN: Small. They’re killing it, yes. I would say, again, it’s not really a lack of focus to have those three buckets
for Iconix. It’s just, now that they’re private they can look in each of those buckets and figure out what the
drags are. Do you really need a team deployed on Artful Dodger? No. I think you could find that can be shelved
or sold or just put on pause. Those individuals can either be cut or redeployed, or those resources can be
redeployed to the brands that have a higher likelihood for success. I think this has taken a lot of handcuffs off
them and allowed for them now to focus on the marquee brands within their portfolio vs across the whole
thing. It takes as much effort to run a small brand struggling sometimes as a brand that’s doing incredibly well
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and kicking off great revenue. I think in this case, they’re going to be able to de-focus on some of the draggers
and redeploy those assets or focus their existing assets on the successful ones. I think they will divest some of
these brands, now that they’re not collateralised any longer and they’re not beholden, which will clean up each
of those buckets, clean up the portfolio, make them more efficient and then pave the way hopefully for them to
be able to make more acquisitions.
[00:46:22]
Q: You talked about asset light model where you’re commanding (? 46.26) margins. Could you discuss how
that differs across the categories that you operate in? I don’t think you can get 50% on each category if you’re
in men’s, women’s, children’s and then athletic fashion and other apparel. How could that influence where
management could prioritise some of that focus, given that there’s a higher likelihood of better margin
increase or in growth?
VN: When I say asset lightness, it’s 50% EBITDA margins. There is some change and it’s really less about the
categories, it’s more about the distribution. Obviously your margins are going to be a little less with a Walmart
as they are going to be with a Saks Fifth Avenue. The margin is just a function of royalty collected, less
expenses. The expenses again are mostly legal, trademark, licensing expenses, etc, and then advertising and
maintenance, brand maintenance expenses. Generally those don’t run higher than 30-40%. Doesn’t
necessarily matter which brand. The only time they do is if you see an opportunity or you’re in a relaunch
where you might want to deploy more than category and more of a function of where the brand is. It’s really
every dollar (audio distorts 48.01). We’re not going to spend more than USD 0.50 on marketing and legal, etc.
(Inaudible 48.08) less. So, that’s really what it is. There are (audio distorts 48.15) be dwindled down. Let’s say,
things like they go into a grocery store. There are much thinner margins within food and beverages than there
are… but one of the reasons we chose to be in wearables and also home goods, is the three buckets that we
chose were relatively high margin buckets for our (audio distorts 48.43) and that’s a place where retail can get
high and premium deal economics on our licensing guarantees. Again, really every dollar of licensing revenue
came in to us. (Inaudible 48.55) spending on, the marketing is the biggest expense and then it’s legal and some
administrative. It really doesn’t have an effect. I think they might trim their margins a little bit because (A)
they’re private now, and (B) they’re trying to rebrand and reposition some of these assets so it costs a little
more. Once they’re finding their way and they’re officially selling through in some of stores and some of the
things that they’ve been doing over the years are taking effect, they’ll bounce right back up to those margins.
[00:49:29]
Q: How does the private label aspect apply across categories? It seems like the biggest push from some of
these retailers are in some of those fashion or apparel categories. Could you discuss the categories where
retailers have been reluctant to build a private label presence that brand management companies can continue
to capitalise on, or do you think it will come eventually?
VN: You mean the shift to private label?
NH: Yes.
VN: Okay. Basically every decade or 15 years, the retail community shifts hard towards brands and then over
time they shift hard back towards private label. There is some equilibrium within the middle of that cycle, but
it always happens inevitably if you watch it. Retailers can’t survive without brands. Brands are what draws the
consumer to all of their products, so there’ll never be a world without a need for brands for any specific retailer
or any market. It will shift and we’ve gone through a pretty solid shift into private label in a few years, but I
think the most successful retailers out there, Kohl’s being one of them, you don’t see Kohl’s talking a lot about
their private label right now.
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Kohl’s, who is one of the more successful retailers out there right now, is going very, they’re betting long on
brand. They shifted their largest women’s brand which was Apt. 9 to Nine West, which they licensed from
ABG. They just brought in Tommy Hilfiger, Calvin Klein, they are really going and betting on brands and it’s
working. You’ll see a digression over the next few years as the customer comes flooding back in to buy those
brands, that they’ll start to push their private label again and you’ll have the same shift. They’ll go a little bit
away from brand and then they’ll have to come back. The branded (audio distorts 52.01) not going to be
irrelevant, and that’s the same on Amazon. Amazon would love just to sell their own product but there’s not
enough people out there that are going to give them enough business to replace brands. There will be always
be brands and people looking for brands and searching for them on Amazon. The one thing that will happen is
yes, they’ll bring brands in, they’ll marginalise them every damn time with their own private label and then
they’ll replace them with another brand and do the same thing all over again. It’s just a cycle.
I think the biggest thing we’ve all learned is not to hand over the keys to our brand to a single retailer, but
(audio distorts 52.35) multiple distribution channels with multiple partners and categories so that we can
weather the storm. If we lose one of the retail partners, we’ve got a few to support us while we’re replacing that
revenue vs losing all of that revenue and all of that partnership and having to start from ground zero. I think
that’s the biggest evidence in what Iconix went through. I think the other thing is, and this is not a disparaging
remark, is we’ve seen in a lot of the brand management companies the licensing headset is different than the
operating headset. Every time one of these companies hires a CEO from a big operating company, it happened
at Sequential Brands, it certainly happened at Iconix, they can’t get their head wrapped around how licensing
works. It’s just a different mindset. They try and fit the licensing model into the operating model and it fails
every single time. I think one good thing about Bob Galvin is he comes from the licensing headset, so he
understands both sides and he understands the business. I think that’s why they’ll be successful in the
management side.
[00:53:39]
Q: What key factors do you think are overlooked, such as the licensing aspect, that you think investors should
monitor as we come out of coronavirus? As coronavirus persists are you bullish or bearish in the industry?
This model seems to be a little unsustainable. What are your overall thoughts on the long-term viability of this
model as it is now when it comes to brand management?
VN: I think the big thing is the successful companies are investing back into the brands through marketing
and other initiatives, and not letting these portfolios rot (inaudible 54.24) while they’re hiding the revenue
through acquisitive growth. I think that’s a real big one. I think the international market, COVID or without,
are definitely a key growth area for the whole sector, an advantage Iconix have. I think for investors that might
be on the phone, I think you really need to look at the performance of these brands as compared to their
licensing agreement. If they have a licensing agreement that commands USD 4m a year in minimum licensing,
guaranteed revenue, and that operating partner who’s promised that (A) is not going to have a good credit
situation, or (B) is not able to perform to that, there’s going to a problem sometime and a reckoning. They’re
either going to go and seek relief, which is a lot of what they (audio distorts 55.09), they’re going to try and get
out of contract, or they’re just going to give up. I think you need to see that whatever minimum guarantee is,
because that’s what this business is made on, that you’ve got good credits on these operating partners,
meaning they’re credit worthy and that they’re close or exceeding what they’ve guaranteed to these licensors. If
that’s not, they’re just going to try and figure out a way to get out of it.
[00:55:36]
NH: I think that’s a good place to end our Interview. Let me just close by saying thank you, Vincent, for your
time today. I really enjoyed it, we were able to get through a lot. Thank you clients for joining Third Bridge
Forum’s Interview. If you would like to speak with our specialist, Vincent, in a private call or meeting then
please let your relationship manager know. Have a good one.
Private and confidential 14
VN: Thank you.
Transcription ends at 00:55:49 of the recorded material.
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