New Partnerships With Lacoste And Dickies Will Expand Retail Reach And Strengthen Brand Portfolio

Key Takeaways

• Expanding retail operations and reacquiring franchises are pivotal strategies for revenue and profit growth through increased retail and franchise presence.
  
• Strategic brand agreements and cost efficiency efforts aim to bolster wholesale revenue, improve margins, and enhance earnings with a focus on high-margin products.
  
• A shift to a promotional environment and rising operational costs could squeeze net margins, with expansion risks and currency exposure posing further challenges to earnings.

Catalysts

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

• The roll-out of at least 10 new stores in the second half of FY '25 is expected to drive future revenue growth as the company expands its retail footprint and reaches more customers.
  
• The Athlete's Foot franchise reacquisition program, with 10 more stores planned to be acquired by June 2025, aims to enhance earnings by capturing a greater share of profits from these stores.
  
• Distribution agreements with Lacoste and Dickies, along with the re-signing of Merrell and Timberland, position the company to increase wholesale revenue and improve gross margins by focusing on high-margin brands.
  
• Successful cost efficiency initiatives, including support team cost reductions and improved lease renewals, are expected to sustain or improve net margins by reducing the cost of doing business.
  
• Continued growth in Vertical owned brand sales and stronger brand offerings like Hoka and Merrell could improve earnings and gross margins through higher-margin Vertical brand sales.

Accent Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Accent Group's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 5.7% in 3 years time.
• Analysts expect earnings to reach A$106.5 million (and earnings per share of A$0.18) by about April 2028, up from A$64.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$125 million in earnings, and the most bearish expecting A$89.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 15.6x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 19.3x.
• 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 8.56%, as per the Simply Wall St company report.

Accent Group Future Earnings Per Share Growth

Risks

• The reduction in gross margin percentage by 100 basis points due to a more promotional consumer environment could negatively impact net margins as it indicates a need to offer more discounts to stimulate demand.
  
• Inflationary pressures in store team wages and annual rent reviews could increase operational costs, squeezing net earnings unless offset by sufficient revenue growth.
  
• There is execution risk in regard to the planned expansion and refitting of stores, which requires capital investment that could divert funds from potential returns to shareholders and pressure future earnings.
  
• Continued challenges in New Zealand, which accounts for 10% of business, could impact overall revenue growth and profitability if regional economic issues persist.
  
• Potential currency risks related to US dollar exposure, with a drop in forward hedges to 30% and a reliance on spot rates, could affect earnings if exchange rates become unfavorable.

Valuation

• The analysts have a consensus price target of A$2.375 for Accent Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.7, and the most bearish reporting a price target of just A$1.95.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.9 billion, earnings will come to A$106.5 million, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 8.6%.
• Given the current share price of A$1.78, the analyst price target of A$2.37 is 25.0% higher.
• 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.