Australia | Nov 26 2018
Removing discount-driven promotional activity at the end of FY18 has had a positive impact on footwear retailer Accent.
-Strong like-for-like sales in the face of difficult retail trading
-Investment in online procuring substantial increase in sales
-Roll-out numbers increase, supported by results from new stores, leasing deals
By Eva Brocklehurst
The critical Christmas trading period is yet to play out but footwear business Accent ((AX1)) expects strong first half earnings, as improved margins and the online business have an impact.
After the first 20 weeks of FY19 the company remains focused on its strategy of "No Lazy Retailing", having removed discount-driven promotional activity. The resultant increase in margins has been a driver of forecasts for improved profits.
Like-for-like sales in the year to date are up 2.5%, which Bell Potter observes is broadly steady with the growth achieved in the second half of FY18. The broker believes this is a strong outcome, given the difficult retail trading environment.
The company expects first half operating earnings (EBITDA) to be 15-20% higher. Second half earnings are expected to grow by mid single digits as the benefits of lower discounting on gross margin ease, given this commenced in the second half of FY18.
Franchise income is expected to fall as stores are corporatised in coming years. The company has indicated the buying back of The Athlete's Foot stores is tracking to plan, with around 50 corporate stores expected by the end of FY19.
Morgans upgrades to Add from Hold with a target of $1.46, believing the recent de-rating of the share price means the stock is trading on a more reasonable multiple. The broker had anticipated sales would slowdown after the FY18 result because of a reduction in clearance activity and the cycling of a strong result within Hype. December is an important month, but there is upside risk to guidance because of the expansion in gross margin to date.
Accent remains Citi's top pick in the small cap retail sector, with a Buy rating and $1.65 target. The business has a lower level of housing exposure versus sector peers such as Nick Scali ((NCK)) and Beacon Lighting ((BLX)). The broker also believes the risk from Amazon is overstated in the short term.
Moreover, there is medium-term upside potential from rolling out of international stores, options that are being explored. Citi suspects like-for-like sales momentum probably slowed to around 1.4% over the last 13 weeks of the first half, probably because of unfavourable weather and reduced discounting.
Slowing sales would be in line with recent trading updates from Myer ((MYR)). The broker also agrees a strategy to reduce discounting has been successful and there is upside if pent-up consumer demand is unleashed from less discounting. Momentum in licenced brands such as Vans and Skechers should also underpin the business.
Growth may have slowed, but the strategy to dramatically reduce discounting has had an impact. Reduced clearance activity and a greater proportion of vertical branded sales have expanded gross margins significantly. Morgans notes gross margins were up more than 300 basis points versus the prior comparable period.
Morgans expects FY19 operating earnings to grow 13.6%, supported by like-for-like sales growth of 2.5%, a net 32 new stores and an increase in gross margin over the year of 150 basis points.
Citi expects gross margin expansion should moderate in the second half, forecasting expansion of 25 basis points on the back of increased vertical brand sales, larger proportion of higher-margin retail sales, higher-margin accessories and favourable FX.
Bell Potter strengthens its gross margin forecasts and assumptions for new stores. The net effect is an increase for FY19 and FY20 earnings-per-share estimates of 6.4% and 7.7% respectively. Bell Potter assesses Accent as a stand-out performer in the retail space and maintains a Buy rating and $1.75 target.
Online sales growth has been exceptionally strong, up 88% year-to-date, a result of investment in this channel in recent years as well as premium delivery options. Store roll-out in FY19 has been increased to around 40 versus 30, stemming from better trading at new stores and attractive leasing deals. Bell Potter believes the combination of a vertical model, omni-channel capabilities and expansion into Asia is attractive.
Accent owns/operates a number of footwear businesses including multi-brand The Athlete's Foot Australia, Platypus and Hype as well as single-branded store such as Merrell, Skechers, Vans and Timberland.
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