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Why Shares of Sequential Brands Tumbled Today

Image source: Sequential Brands.

What happened

Shares of apparel licensing and brand management company Sequential Brands (NASDAQ: SQBG) plunged on Thursday following a mixed third-quarter report. While revenue came in a bit higher than expected, guidance for full-year earnings was slashed. At 11:20 a.m. EDT, the stock was down about 32%.

So what

Third-quarter revenue soared 83% year over year to $42 million, about $2 million higher than the average analyst estimate. The company pointed to strong performance from its core brands, including Jessica Simpson, William Rash, and Heelys, in addition to contributions from recently acquired brands like Joe's Jeans, Martha Stewart, Chef Emeril, and Gaiam, as the drivers behind its revenue growth.

Non-GAAP EPS came in at $0.12, flat year over year and in-line with analyst expectations. GAAP EPS of $0.02 was down 67% year over year. Higher interest payments and a substantially higher share count were the main reasons for the decline in GAAP EPS.

Sequential Brands reiterated its full-year revenue guidance range of $155 million to $160 million, but it slashed its guidance for GAAP net income. The company now expects to produce net income between $7.7 million and $11 million in 2016, down from a previous guidance range of $12.7 million to $14.6 million. The drop in earnings guidance was due to costs associated with the company's headquarter lease.

Now what

The earnings guidance cut is one factor that contributed to the stock's decline. The lack of non-GAAP earnings growth during the third-quarter may also be a concern, and the amount of interest Sequential Brands now pays is certainly on investors' minds. During the third quarter, the company's interest expense was $14.7 million, about 35% of revenue. There's now over $600 million of debt on the balance sheet.

The company's strategy of growing via acquisitions is driving revenue higher, but the amount of debt and interest that strategy entails may be causing investors to think twice about the stock.

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Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.