Opening 50 New Stores Will Expand Retail Footprint

Key Takeaways

• Strategic store expansion and online presence enhancement are expected to drive revenue growth through flagship openings and improved customer engagement.
  
• Optimizing brand mix and divesting underperforming assets should enhance gross and net margins, focusing on high-growth banners and international opportunities.
  
• Economic challenges, weak wholesale demand, and competition threaten revenue, profit margins, and net margins amid rising costs and currency fluctuation risks.

Catalysts

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

• The expansion of Accent Group's retail footprint, with plans to open at least 50 new stores in FY '25, is expected to boost revenue growth. This is supported by the success of existing banners such as Skechers and Platypus, and the planned flagship store openings.
  
• A strong emphasis on enhancing the omnichannel experience, combined with a growing online presence, is likely to drive higher sales and improve overall revenue. Accent’s ability to leverage customer insights and loyalty programs can foster repeat purchases and enhance customer lifetime value.
  
• Improvements in the gross margin are anticipated due to an increased mix of distributed and vertical owned brands, which provides better margin profiles. This aligns with Accent’s focus on improving underlying gross margin and offering a competitive advantage.
  
• The divestment of underperforming Glue stores and the strategic decision not to renew the CAT distribution agreement are aimed at optimizing capital allocation and improving net margins by focusing resources on high-growth banners.
  
• The launch of a U.S. online platform for Nude Lucy signifies future international expansion opportunities, which could lead to incremental revenue growth. The successful establishment of the brand in the U.S. market can open up new revenue streams and increase overall earnings.

Accent Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Accent Group's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.0% in 3 years time.
• Analysts expect earnings to reach A$104.4 million (and earnings per share of A$0.18) by about February 2028, up from A$59.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$123 million in earnings, and the most bearish expecting A$87.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, down from 20.3x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 18.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.55%, as per the Simply Wall St company report.

Accent Group Future Earnings Per Share Growth

Risks

• The challenging economic and consumer environment could dampen overall consumer spending, which might negatively impact revenue growth and profit margins.
  
• A 17% decline in wholesale sales suggests weaker demand from wholesale customers, posing a risk to revenue growth and dependence on retail to offset these losses.
  
• Increasing competition and promotional activity in the market, as noted by the aggressive promotional environment, could pressure gross margins by forcing discounting and reducing profitability.
  
• The cost of doing business (CODB) increased year-on-year by 140 basis points, primarily due to cost inflation in occupancy and store team costs, which could erode net margins if revenue growth does not adequately cover these costs.
  
• Potential negative impacts from foreign exchange rates, with sensitivity to exchange rate fluctuations affecting earnings, particularly if the Australian dollar weakens against other currencies.

Valuation

• The analysts have a consensus price target of A$2.465 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$2.75, and the most bearish reporting a price target of just A$2.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.7 billion, earnings will come to A$104.4 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of A$2.14, the analyst price target of A$2.46 is 13.2% 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.