Small Caps | Apr 26 2021
This story features ACCENT GROUP LIMITED. For more info SHARE ANALYSIS: AX1
Accent Group has stepped into apparel, taking on the challenge of reinvigorating a struggling retail operation
-Potential for upside from a small investment
-Time-consuming restructure of Glue Store likely
-Not without risks
By Eva Brocklehurst
In the pursuit of growth, Accent Group ((AX1)) will expand from a focus on footwear by acquiring the youth-oriented Glue Store retail operation along with several brands from Next Athleisure for $13m.
The deal makes strategic sense, Morgan Stanley assesses, with the potential of strong upside for a small investment. It will broaden the apparel offering from Accent and offer the opportunity for cross-selling.
Glue Store is an Australian youth apparel, shoe and accessory retailer and operates 21 stores as well as an integrated online site that generates around $90m in annual sales. The business is expected to contribute little to earnings initially, although through synergies and retail expertise Accent should be able to lift margins for Glue Store.
Bell Potter assumes 5-10% earnings (EBIT) margins by FY23, which compares with Accent's typical in-store EBIT margin of around 15%. There is also scope to roll out Glue Store across Australasia.
The company did not provide an earnings profile but Morgans believes the acquisition is a "natural adjacency" and highlights Accent's a five-point strategy for improving the business.
This includes leveraging existing landlord relationships, accelerating the digital offering and growing the footwear range in Glue Store. Yet the broker points out extensive restructuring is probably required in order for the business to contribute meaningfully to group earnings in the future.
Bell Potter believes Accent's growth will accelerate in a fragmented youth apparel market and complement the existing youth footwear business. Citi agrees profitability improvements are possible, as existing landlord relationships can be leveraged and discounting reduced. There is also in opportunity to increase the penetration among key verticals.
Store Network Potential
The broker calculates that Glue Store could roll out an additional 39 stores and reach levels of penetration enjoyed by competitors Universal and General Pants. A roll-out of this magnitude could contribute an extra $20m in operating earnings over the long term.
This does not mean risks are absent. Citi notes Accent Group is already in pursuit of other growth opportunities which could result in competition for management time and resources.
Apparel, which accounts for 85% of Glue Store sales, has a greater risk of write-downs because of a high reliance on the fickle nature of fashion. Historically, Accent has had limited apparel in its ranges and exposure has now increased with the acquisition of Stylerunner in November 2019 and now Glue Store.
While this is a natural expansion for the company, Morgans points out Glue Store has struggled in recent years and it will take time to restructure, noting the business has possibly benefited from a spike in demand that has been experienced across the entire apparel industry.
Corporate synergies from overheads and potential rent savings stemming from Accent's significant scale should mean Glue Store ultimately provides a reasonable contribution. Still, Morgans awaits more details on the aspirations for the new business before factoring it into forecasts, anticipating a negligible contribution in FY21/22.
The low-priced acquisition may mean the downside is limited yet Citi downgrades to Neutral as the share price has risen 25% over the past month. The broker considers the P/E ratio of 20x FY22 is appropriately factoring in the rewards/risk.
Morgan Stanley finds the acquisition multiple "cheap", noting the upside from synergies and the company's strong track record but remains concerned that the performance of Glue Store has been challenged over the last few years and the store count has decreased.
The broker suspects that business has lost share to a competitor that is growing rapidly and, while revising growth estimates higher, suspects comparables will be difficult to hurdle in FY22.
Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, considers the acquisition attractive and retains an Buy rating with a $3.30 target, while there are three Hold ratings on the database. The consensus target is $2.82, signalling -2.5% downside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.2%.
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