Small Caps | Aug 26 2019
Footwear retailer and distributor Accent Group is trialling new store concepts while offering a superior digital presence. Growth initiatives in the near term are primarily in the domestic sphere.
-Seeking under-represented areas of the domestic footwear market
-Gross margin up strongly, reflecting cessation of widespread discounting
-Investment in omni-channel approach paying dividends
By Eva Brocklehurst
As others look offshore for expansion opportunities, Accent Group ((AX1)) is playing it safe, building out its domestic presence as a footwear retailer and distributor.
Citi believes Accent is one of the most innovative and driven listed retailers and the market should like its lower-risk Australian focus. The trading update for the first seven weeks of FY20 signalled like-for-like sales were up 2.7%.
No formal earnings guidance was provided at the results but the company expects to roll out 40 stores in FY20 and there will also be the benefit from the annualised performance of 54 stores that were rolled out in FY19.
Like-for-like sales growth is expected in the low single digits and gross margin should be in line with the previous year. Morgans notes the FY19 results were among the strongest across the retail sector in the current reporting season, with operating earnings (EBITDA) up 22.5%.
The broker expects another strong year of digital sales growth in FY20 because of the recent launch of express delivery, the “endless aisle” and the new website, while the growth profile could be larger and of longer of duration than what is being priced into the stock.
Citi, which retains a Neutral rating and $1.61 target, suggests the digital offering is best in class and there are options to be developed from new store concepts. Online penetration is now at 15% and the company has effectively met its targets a year earlier than previously forecast. Digital sales grew 93%, with particularly strength in Skechers, Vans, Doctor Martens, Timberland and Merrell.
Morgans also highlights that Accent has also found its digital sales are attracting similar profit margins to the retail stores, the opposite of other retailers, and welcomes the investment in the omni-channel approach, which appears to be paying dividends.
Gross margin was up strongly and reflected the cessation of blanket discounting, increased vertical brand/product penetration and margin improvement in The Athlete's Foot. That said, gross margin was below Morgans' forecasts as the company sustained a strong inventory clearance program in June. Morgans has an Add rating and $1.72 target.
The business also comfortably met Bell Potter's expectations with most platforms performing strongly. The broker believes a combination of the vertical model, omni-channel capabilities and an undemanding valuation are attractive and retains a Buy rating with a $1.78 target.
The company continues to seek under-represented areas of the domestic footwear market, trialling a new concept called PIVOT for value sport and street-inspired footwear not currently available locally.
Morgans assesses this concept is a mix of the old Amart All Sports and Platypus, although at a lower price point. There will be no crossover of product between PIVOT and the company's other retail store brands and PIVOT will sell products not currently available domestically.
The children's concept Trybe is also being rolled out fully after the four pilot stores were successful, moving past the trial phase quicker than Citi expected. The company believes this is a 40-store concept for Australasia and notes trading has been ahead of expectations to date.
Citi notes international aspirations have been put on the back burner in order to focus on the domestic opportunities and, while this makes the outlook less exciting, it allows the company to better leverage existing infrastructure and support functions.
The company bought back 21 franchises at The Athlete's Foot in FY19. The operating earnings impact was neutral because the investment costs required to acquire these stores and develop retail infrastructure.
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