Things Are Looking Up for Fashion Firms

The predication comes as the three firms ready to release their Q2 earnings, on the heels of positive reports from similar organizations including

Sequential Brands Group

.

Cherokee Global Brands boasts brands such as Cherokee, Tony Hawk, Liz Lange, Hi-Tech, Magnum and Everyday California, among others. Meanwhile, Iconix owns and manages a portfolio that includes Danskin, Mossimo and Candie’s, among many others. Finally, Xcel Brands boasts properties like Isaac Mizrahi, C. Wonder and Judith Ripka, among others.

The capital markets firm reports that the brand licensing segment is still attractive to investors due to an “impressive” risk/reward equation, despite the several years of declines in the industry. However, FBR cautions that several key catalysts must exist in order to remind

The brand licensing segment tracked by FBR (which includes a number of brand licensing firms primarily in the fashions space) saw a decline of 28 percent for the first half of 2016 on the FBR Brand Licensing Index, but the S&P 500 rose 8 percent in the comparable period. In fact, the sector has been one of the worst performers since the second half of 2015 on the FBR Brand Licensing Index, with a 48 percent decline in 2015 and 27 percent decline in 2016.

The period was marked by major headlines from some of the biggest players in the space with Cherokee losing its long-standing contract at Target and accounting irregularities uncovered at Iconix.

For its part, Iconix has worked diligently to correct its financial issues in the intervening years. FBR believes Iconix, which saw CEO Neil Cole step down in 2015, is now in stronger financial shape after paying down material levels of debt and is positioned to return to organic growth in the second half of 2017.

Cherokee meanwhile has struggled to file year- and quarter-end financial reports in a timely manner. However, FBR expects Cherokee to slowly replace the revenues it lost after ending its distribution with Target.

During the same period, FBR says mergers and acquisitions were more harmful than beneficial for these companies. For example, Iconix sold its entertainment division to pay down debt. Sequential has also focused on debt pay down as well as on a plan to refinance its current obligations in early 2018.

Since Sequential’s acquisition of the Martha Stewart brand in 2015, the company has made significant changes to its management team with the addition of new CEO Karen Murray and COO Andrew Cooper, and registered strong quarters in 2017. However, the company continues to trade at multi-year lows.

For Xcel Brands, there has not been one specific event that has led to its declines. However, FBR notes that is can be difficult for smaller players to escape the associated skepticism of the brand licensing segment. However, with the company’s new quick-response model in place, FBR expects leverage to become more apparent for the company.