Sequential Brands Group, Inc. (SQBG) owns and manages a diversified portfolio of consumer brands in the active and lifestyle categories. The brands under which it operates include William Rast, Heelys, Caribbean Joe, and Jessica Simpson. SQBG’s stock has gained 9.4% so far this year and 38.3% over the past month.
However, its share price has slumped 29.3% over the past three months. This decline can be attributed primarily to investors’ concerns surrounding the company’s deal to sell its majority stake in the fashion line back to Jessica Simpson and other assets as part of a potential bankruptcy filing.
SQBG’s stock is currently trading 61.2% below its all-time high of $40.49. In addition to the apparel manufacturer’s anticipated bankruptcy, the lawsuits filed against the company for alleged securities law violations could make matters worse. This uncertain backdrop has the potential to drive the stock into a downtrend.
Here is what we think could influence SQBG’s performance in the near term:
Potential Bankruptcy Concern
In April, SQBG closed the sale of its Heelys brand for $11 million in cash to BBC International. The company plans to use the net proceeds from the sale to pay down its debt. In fact, SQBC plans to sell off its majority stake in the Jessica Simpson fashion brand back to the singer as a part of a potential Chapter 11 bankruptcy filing. It plans to use the proceeds to repay creditors, such as KKR & Co., and avoid a cash crunch.
Ongoing Investigations and Lawsuits
In May, the Schall Law Firm and Gainey McKenna & Egleston filed a class action lawsuit against SQBG on behalf of its shareholders for violations of federal securities law. Bronstein, Gewirtz & Grossman, LLC and Bragar Eagel & Squire, P.C. have also filed a class action lawsuit against the company on behalf of its investors. Moreover, Scott+Scott Attorneys at Law LLP has commenced an investigation of SQBG concerning potential fiduciary duty breaches by certain directors and officers of the company. Since these lawsuits and investigations could raise investors’ concerns about the stock’s near-term prospects, its share price could tank further.
SQBG’s trailing-12-month revenues came in at $89.81 million. But the company’s trailing-12-month net income was negative $89.42 million, while its trailing-12-month operating loss amounted to $45.11 million over this period. Also, it’s trailing-12-month net interest income came in at negative $48.25 million.
The company’s trailing-12-month net income margin, ROA and ROE came in at negative 99.6%, 15.8% and 125.8%, respectively. Also, its 3.7% trailing-12-month ROTC is 31.4% lower than the 5.4% industry average. Also, the company’s 4.29 million trailing-12-month cash from operations is 98% lower than the 216.22 million industry average.
Consensus Price Target Indicates Potential Downside
Currently trading at $15.70, the $12 consensus price target for SQBG indicates a potential decline of 23.6%.
POWR Ratings Reflect Bleak Prospects
SQBG has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. SQBG has a D grade for Quality and Stability. The stock’s weak profitability and volatility are reflected in these grades.
SQBG has a C grade for Value. This is consistent with the company’s 5.79x trailing-12-month EV/Sales ratio, which is 232.4% higher than the 1.74x industry average.
In addition to the grades we’ve highlighted, one can check out additional SQBG ratings for Sentiment, Momentum, and Growth here.
SQBG’s diverse consumer brand pipeline has helped its stock soar over the past year. However, concerns related to its anticipated bankruptcy filing and the sale of assets to meet debt obligations, as well as ongoing lawsuits and investigations against the company could cause the stock to suffer a pullback in the coming months. Furthermore, its weak profitability and financials could limit its growth prospects. As such, the stock is best avoided now.
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SQBG shares rose $0.80 (+5.10%) in premarket trading Tuesday. Year-to-date, SQBG has gained 14.29%, versus a 16.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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