Small Caps | Sep 10 2024
Accent Group is a tale of recovery and conservative guidance combined with multiple levers to generate upside potential in earnings growth.
-UK retailing giant buys Accent Group equity stake
-Market seen jumping at FY24 shadows
-Margin improvements can drive a stock re-rating
By Danielle Ecuyer
Strategic opportunities on the menu
Apparently markets are forward looking, inferring through the doom and gloom of the current high interest rates regime, at some point cyclical discretionary stocks should experience the updraft of improved sentiment as the probability of lower interest rates increases.
Accent Group ((AX1)) is one such retailer that has captured the interest of brokers and of a major UK retail group, Fraser Group plc.
From what the company describes as "humble beginnings" in 1988 as a New Zealand-based wholesale distributor, the group today runs over 800 stores, 24 brands and more than 35 online platforms. A quick scan over the company's website and a who's who of the global footwear brands are on display, including the fast growing new "IT" trainer on the block, Hoka.
Fraser Group recently popped onto the share register with the acquisition of BBRC's 14.65% stake in the company. BBRC's initial stake of 11.82% was purchased at 95c per share in 2017. BBRC is legendary local retailing investor Brett Blundy's investment vehicle.
Citi highlights the Fraser Group investment brings forth several options for the company, including the possibility of Accent to run Sports Direct (the UK's largest sports good retailer) in Australia. Frasers also recently announced a joint venture with MAP Active to run Sports Direct in Indonesia and expand into Malaysia.
The broker observes the potential for Accent to export its "high margin vertical brands" into Europe; achieve better supply terms from major brands and a cross sharing of intellectual property.
On balance, Citi alludes to the newcomer on the register as offering potential strategic significance for the company.
Margin expansion generates earnings leverage
Operationally, the market at first response poo-pooed the FY24 results and trading update on a gross profit margins miss, sending the shares down -15% on the day which Jarden believed was an "overreaction".
The recovery in the share price with the benefit of hindsight, suggests the broker's interpretation was on the mark. Accent has multiple earnings drivers in FY25 and beyond.
Jarden points to the buyback of The Athlete's Foot franchises, closing unprofitable stores and increased cost outs as positive earnings drivers.
The market also took the same-store-sales 3.5% growth in the FY25 trading update as a downer compared to the 4.1% growth rate for 2H24. Petra Capital digs a little deeper and emphasises the group was cycling weaker comps in May/June versus July (the start of FY25). On a two-year basis there was no slowing with footwear also performing more strongly than apparel.
Petra Capital believes the key ingredient for a share price re-rating is the ability to decrease the cost-of-doing-business. Inflation cost pressures from wages growth and rental leases are being offset by cost savings from Glue store closures, re-negotiated leases and other measures.
Morgan Stanley leans into the expectation of improved margins for Accent over FY25. This broker expects the earnings before interest/tax to reach 9.1% and although below the FY21 level of 12.8%, the trend is rising from the low in FY22 at 6.3%.
Inputting the FY19 10.4% margin would imply a 14% upgrade to FY25 earnings against the broker's forecast.
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