Rising Operating Costs And Online Pressure Will Squeeze Profitability

Key Takeaways

• Store-heavy strategy and costly refurbishments may not offset weak foot traffic and rising e-commerce competition, pressuring long-term profitability.
  
• Margin pressures from price promotions, inflation, and supply chain volatility threaten earnings, especially amid challenging consumer demand and exposure to key brand partnerships.
  
• Growth in owned brands, exclusive partnerships, network optimisation, targeted marketing, and cost management are supporting profitability, market share, and long-term financial resilience.

Catalysts

Engages in the retail, distribution, and franchise of lifestyle footwear, apparel, and accessories in Australia and New Zealand.

• As the shift to online shopping accelerates and global e-commerce giants expand their footprint, Accent Group's brick-and-mortar store-centric model faces long-term threats to both revenue growth and profitability, especially given the company's aggressive recent store rollouts and program of costly refurbishments which may fail to deliver the expected uplift if foot traffic continues to erode.
  
• Persistent cost-of-living pressures and weak discretionary spending trends in Australia and New Zealand pose increasing risks to Accent Group's core customer base; ongoing margin-depleting promotional activity required to stimulate demand will likely continue, compressing gross margin and stalling earnings growth.
  
• The reliance on distributed brands for a significant part of the product mix exposes Accent Group to volatility in distribution agreements-any loss or unfavorable renegotiation, particularly with top brands like Nike, Adidas, or Hoka, could disrupt product availability and drive down revenue and gross profit.
  
• Inflationary pressures in wages and rents, compounded by rising labor and occupancy costs across Australia and New Zealand, threaten to outpace efficiency efforts, squeezing net margins further at a time when like-for-like sales growth is running below the 3 percent comp threshold needed to achieve operational leverage.
  
• The company faces elevated supply chain vulnerabilities with around 60 percent of product sourcing exposed to US dollar risk; with a lower-than-usual hedge ratio, any further decline in the Australian dollar from recent levels could drive up cost of goods, increasing working capital requirements and directly impacting EBIT and net profit.

Accent Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Accent Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Accent Group's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.3% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach A$92.1 million (and earnings per share of A$0.15) by about July 2028, up from A$64.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 14.1x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

Accent Group Future Earnings Per Share Growth

Risks

• The strong performance and positive trends in owned vertical brands such as Nude Lucy, Stylerunner, and The Athlete's Foot have contributed to growing profitability and higher gross margins, which may support earnings and net margins over the long term.
  
• Expansion of exclusive distribution agreements with major global brands such as Lacoste and Dickies, along with the renewal of partnerships with Merrell and Timberland, creates opportunities for increased market share and revenue growth in future years.
  
• Ongoing network optimisation and store refurbishments, coupled with selective new store openings, are driving higher returns on investment and strengthening the customer experience, suggesting potential for same-store sales growth and EBITDA improvement.
  
• An extensive and growing customer database of 10 million contactable customers, together with loyalty platform enhancements, enables targeted marketing and repeat purchases that could stabilise or grow top-line revenue and customer lifetime value.
  
• The company's ability to successfully manage cost structures-achieving improved cost of doing business ratios despite inflationary pressures-and annualising benefits from recent efficiency programs provide resilience to net profit even in a promotional retail environment.

Valuation

• The assumed bearish price target for Accent Group is A$1.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Accent Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.5, and the most bearish reporting a price target of just A$1.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.8 billion, earnings will come to A$92.1 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of A$1.51, the bearish analyst price target of A$1.4 is 7.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.