Savvy Trades and Investments

[abh3vt]

SQBG is a beaten down licensor of the Martha Stewart brand. Trades at around 3.00/share, which is 5.7x FY17 forward estimates. They announced fairly decent Q1 results earning non GAAP 0.09/sh (0.08 if using a proforma tax rate of 35%). They beat estimates by about 0.03, and have guided for growth in Revenue and adjusted EBITDA for FY17. The stock soared on the initial news up to 4, but has since settled back down into the low 3s amid the retail gloom.

A new relationship with QVC (skin care products/apparel) should start to kick in during the 2nd half of FY17, and they already have the brand associated with food/wine delivery (Marley Spoon, Hello Fresh). The complete list is here:
http://sequentialbrandsgroup.com/our-brands/

From the 10Q description of the company:

Licensing and Brand Management Business

We own a portfolio of consumer brands in the fashion, home, athletic and lifestyle categories, including Martha Stewart, Jessica Simpson , AND1 , Avia , Joe’s Jeans , Heelys and GAIAM . We aim to maximize the value of our brands by promoting, marketing and licensing the brands through various distribution channels, including to retailers, wholesalers and distributors in the United States and in certain international territories. Our core strategy is to enhance and monetize the global reach of our existing brands, and to pursue additional strategic acquisitions to grow the scope of and diversify our portfolio of brands.

We aim to acquire well-known consumer brands with high potential for growth and strong brand awareness. We additionally seek to diversify our portfolio by evaluating the strength of targeted brands and the expected viability and sustainability of future royalty streams. Upon the acquisition of a brand, we partner with leading wholesalers and retailers to drive incremental value and maximize brand equity. We focus on certain key initiatives in our licensing and brand management business. These initiatives include:

· Maximizing the value of our existing brands by creating efficiencies, adding additional product categories, expanding distribution and retail presence and optimizing sales through innovative marketing that increases consumer brand awareness and loyalty;
· Developing international expansion through additional licenses, partnerships and other arrangements with leading retailers and wholesalers outside the United States; and
· Acquiring consumer brands (or the rights to such brands) with high consumer awareness, broad appeal and applicability to a wide range of product categories.

Our business is designed to maximize the value of our brands through license agreements with partners that are responsible for manufacturing and distributing our licensed products and, with the exception of our Martha Stewart brand, primarily responsible for the design of such licensed products. Our brands are licensed for a broad range of product categories, including apparel, footwear, eyewear, fashion accessories and home goods, as well as, with respect to our Martha Stewart brand, food, wine, pet supplies and a variety of media related assets, such as magazines, books and other print and digital content. We seek to select licensees who have demonstrated the ability to produce and sell quality products in their respective licensed categories and have the capability to meet or exceed the minimum sales thresholds and guaranteed minimum royalty payments that we generally require.

We license our brands to both wholesale and direct-to-retail licensees. In a wholesale license, a wholesale supplier is granted rights (typically on an exclusive basis) to a single or small group of related product categories for a particular brand for sale to multiple accounts within an approved channel of distribution and territory. In a direct-to-retail license, a single retailer is granted the right (typically on an exclusive basis) to sell branded products in a broad range of product categories through its brick and mortar stores and e-commerce sites. As of March 31, 2017, we had more than one-hundred fifty licensees, with wholesale licensees comprising a significant majority.

Our license agreements typically require a licensee to pay us royalties based upon net sales and, in most cases, contain guaranteed minimum royalties. Our license agreements also require licensees to support the brands by either paying or spending contractually guaranteed minimum amounts for the marketing and advertising of the respective licensed brands. As of March 31, 2017, we had contractual rights to receive an aggregate of $429.6 million in minimum royalty and marketing and advertising revenue from our licensees through the balance of the current terms of such licenses, excluding any renewals.

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Beyond the obvious connection to the hard-hit retail sector, the company is carrying about 600MM in LT debt on the balance sheet. Tangible book value is negative, but that assigns zero value to goodwill and intangibles. Stated book is around 7.35/share, which excludes the non-controlling interests.

The company has projected the following guidance for FY17:

For the year ending December 31, 2017, the Company is reiterating guidance of $170 million to $175 million in revenue and $98 million to $102 million of Adjusted EBITDA. The Company’s GAAP net income is now expected to be $15.5 million to $18.1 million due to costs associated with the departure of the Company’s CEO as mentioned above. The Company’s contractual guaranteed minimum royalties for 2017 are approximately $120 million. Consistent with the Company's historical quarterly results, the Company expects revenue for 2017 to be weighted to the third and fourth quarters due to seasonality in the businesses of many of the Company's licensees.


This equates to a non-gaap range of fd eps of 0.49 - 0.55. I'm using a personal estimate of 0.42/share, but that includes a 35% pf tax rate. I think the stock could trade in the mid to high 4s, if the company hits analyst ests for Q2 and continues to guide for a strong 2nd half. The stock is in a LT downtrend and is trying to find a bottom. If you like to buy low, and are a bit of a contrarian, this could be a decent turnaround play.