Company Overview: Accent Group Limited (ASX: AX1) is a leading retailer and wholesaler of premium lifestyle footwear, apparel and accessories in the Australia and New Zealand region. The company owns several vertical brands, including Stylerunner The Label, Exie, Nude Lucy, Article one, Henley’s, Lulu and Rose, ITNO, Alpha, Mindful department, and Beyond Her. The company was listed on ASX on 7 July 2004.

AX1 Details

Expanding Store Portfolio and Improved Financial Performance in FY21: Despite the impact of several lockdowns that occurred during FY21, AX1 reported improved financial performance for the period, demonstrating the strength and the resilience of the business.

• Rise in Total Sales: For FY21, the company reported total group sales (inc. Franchisees) of $1.14 billion, up 19.9% on the previous year, driven by the growth in both retail and online sales.
• Increase in EBITDA: EBITDA for FY21 stood at $242 million, up 19.3% on the prior year, driven by the increase in total sales.
• Completed Acquisition of Glue Store Retail Business: On 31 May 2021, AX1 announced that it has completed the acquisition of the Glue Store retail business and the wholesale and distribution brands business of Next Athleisure Pty Ltd. As a result of the acquisition of Glue store, the company’s total store numbers grew to 638 stores.
• Growing Store Portfolio: During the year, the company opened 90 new stores. AX1 also closed 7 stores where it was not able to achieve the required rent outcomes.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Track Record of Paying Growing Dividend: For H2FY21, the company has declared a fully franked final dividend of 3.25 cents per share with record date of 9 September 2021 and payment date of 16 September 2021. This took the total full year dividend to 11.25 cents, up 21.6% on the previous year. From FY17 to FY21, the company’s dividend grew at a CAGR of 17%, demonstrating the company’s focus on paying growing dividends to its shareholders. At CMP of $2.255, the company’s annual dividend yield stood at 4.8%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 56.1%, slightly up from 55.8% in FY20. ROE for FY21 stood at 18.3%, up from 13.75 in FY19. Current ratio for FY21 stood at 0.90x, down from 0.98x in FY20. Debt to equity ratio for FY21 stood at 0.34x in FY21, down from 0.98x in FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 40.68% of the total shareholding, while the top four constitutes the maximum holding. Blundy (Brett) and Thompson (Craig John) are holding a maximum stake in the company at 18.19% and 6.06%, respectively, as also highlighted in the chart below:                          

Source: Analysis by Kalkine Group

Key Risks:

• COVID-19 Uncertainties: In response to the COVID-19 pandemic, the Government has imposed containment measures such as rolling lockdowns and mandated store closures, which is impacting the company’s profit and cashflows.
• Stiff Competition: Increased competition from new and existing competitors may lead to price deflation and a decline in sales and profitability.

Outlook: Currently, the company is focused on growing its owned brands and apparel presence. The recent acquisition of Glue Store business will allow the company to expand its market share in youth and lifestyle apparel.

Due to the current lockdown scenario, the company anticipates a temporary impact on the trading environment and expects its EBIT to be impacted by at least -$15 million during the months of July and August compared to management expectations prior to the lockdowns.

In FY22, the company is planning to reach the target of 700 stores. During the year, AX1 intends to open at least 65 new stores across all banners. For vertical owned brands, the company expects its sales to grow to more than $70 million in FY22.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  Over the last three months, the stock has corrected by 13.02% and is trading lower than the average 52-week price level band of $1.45-$3.08. The stock has been valued using P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peer average P/E (NTM trading multiple), considering the uncertainty surrounding the impact of COVID-19 pandemic, ongoing lockdowns, and rise in net debt. For the purpose of valuation, peers such as City Chic Collective Ltd (ASX: CCX), Premier Investments Ltd (ASX: PMV) , Baby Bunting Group Ltd (ASX, BBN), etc., have been considered. Considering the company’s rising top and bottom line, track record of paying growing dividends, growing stores portfolio, current trading level, valuation and key associated risks, we give a “Speculative Buy” rating on the stock at the current market price of $2.250 (as on 19 August 2021, 12:30 PM (GMT+10), Sydney, Eastern Australia).

AX1 Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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