Authentic Brands Group is a New York City brand management company that has a lot of clout; it represents mall stores and celebrities among others. It was founded by Jamie Salter in 2010 after he had successfully restructured companies like Polaroid.
The company filed paperwork to go public with the SEC, which begs the question – is Authentic Brands Group stock a buy on its debut?
The company’s heavy exposure to retail is a double-edged sword. On one hand, it owns a lot of high-end brands like Juicy Couture, Brooks Brothers, and Forever 21. But those are largely mall store brands, whose popularity could wane over the next few years as buyer attention is notoriously fleeting when fashions change.
Brick-and-mortar retail’s death has been predicted for decades as Shopify (SHOP), Ebay (EBAY) and Amazon (AMZN) go from strength to stregnth. But many stores – look no further than Best Buy (BBY) – continue to operate and remain profitable.
Is Authentic Brands another Best Buy that can buck the trend of brick and mortar decline?
Authentic Brands Group: Under The Hood
Authentic Brands Group is a retail conglomerate that owns a portfolio of popular brands. On top of the retail brands, it also owns clothing brands Tapout, Reebok and Nautica. That’s in addition to Sports Illustrated, and the rights to celebrities like Marilyn Monroe, Shaquille O’Neal, and Muhammad Ali.
Understanding the value of its vertically integrated portfolio, the company has continued to expand over its first decade through a series of acquisitions.
According to the company’s website, it’s focused on lifestyle and entertainment, and arguably that makes for a compelling investment as there’s a perpetual interest in these areas regardless of economic cycles. The firm is a branding powerhouse with a large physical and digital footprint that spans the globe. This makes it a compelling strategic investment if you believe in the strength of its portfolio.
What Brands Does Authentic Brands Own?
Successful brands under the Authentic Brands portfolio include:
- Above the Rim
- Elvis Presley
- Forever 21
- Lucky Brand
- Nine West
Its business strategy involves partnering with Simon Property Group (NYSE:SPG) and Brookfield Property Partners (NASDAQ:BPYPP) – the largest publicly traded mall owners in the U.S. Many wonder whether these companies will thrive, but so far the signs are relatively positive, and this trio of firms is invested together in many of these mall stores.
Is Authentic Brands Group a Public Company?
The company started discussing a public offering in May 2021, and it filed papers with the SEC by July. It’s still unclear if/when the offering will hit the market, but rumors are swirling that Shaquille O’Neal will be involved.
It has a joint venture group called Sparc Group in partnership with Simon Property Group. Through that partnership, Simon handles the retail while Authentic handles brand management.
Investing in the company could be a risky bet, as the mall revival remains a hotly discussed topic following the surge in traffic post quarantines. At the time, teenagers flocked to stores but the short-term spike could be nothing more than a blip on a chart that tracks the secular decline of brick and mortar stores.
Is there a shaky financial outlook moving forward for the company?
Authentic Brands Group Financials
Authentic Brands Group is expected to open at $10 billion during its public IPO. That’s based on its $489 million in revenue and $225 million net income for 2020. At launch, the IPO is expected to raise $100 million, although it could be waiting for the holiday season before launching.
The company did grow revenue and income from 2019. That’s no easy feat, especially considering how many retailers went out of business due to the lockdowns.
The firm’s growth trajectory continued through the first half of 2020 leading into the IPO announcement with $40 million in revenue growth in the first quarter alone. However, many analysts warn that the retail apocalypse could have long-lasting effects, and there’s little guarantee that the previous growth can be sustained.
Some worry the gap between filing and listing its IPO could be due to the company weathering a down quarter. That seasonality highlights one of the many risks involved in this investment.
What Could Go Wrong?
Although the company grew from $1 million in revenue in 2010 to nearly $500 million a decade later, the company faces a retail squeeze. Much of its top line sales depends on its partners, who in turn heavily tethered to consumer spending and the whims of fashion trends.
The company unloaded most of its operating expenses through Sparc Group, but it does have $1.8 billion in debt on its books with more coming down the pipeline. And the bulk of its licensing revenue (79 percent) comes from North America.
Management’s proclivity to grow via acquisitions could eventually prove financially unsustainable and leave investors with a hefty debt burden, causing the balance sheet to weaken and ultimately cash flow problems.
Is Authentic Brands Group Stock a Buy? The Bottom Line
Authentic Brands Group reported exponential growth over the past decade, an impressive feat given its exposure to brick and mortar retail stores and fashion trends.
The volatile retail sector, and more specifically the decline of malls, represents a serious risk factor. Stores like Target and Best Buy are working to convert their locations into destination showrooms. So far, that strategy has proven wildly successful.
It’s very unclear though whether the quarantine and government-backed surge in retail spending over the past year will sustain positive trends for retailers over the medium to long-term.
Retail consumers pulling their purse strings could put Authentic Brands’ partners in a precarious position. And with the firm assuming heavy debt already, even the good times may not be enough to sustain the bad.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.