Athleisure Trends And Digital Expansion Will Reshape Retail Landscape

Key Takeaways

• Accelerated expansion through Sports Direct rollout, vertical brand growth, and exclusive partnerships positions Accent Group for outsized sales and earnings growth versus sector averages.
  
• Enhanced omni-channel strategy, cost efficiencies, and supply chain control enable faster margin expansion and best-in-class customer retention with limited incremental costs.
  
• Store expansion and rising costs face structural risks from digital shift, brand competition, consumer spending pressures, declining margins, and heightened regulatory and supply chain challenges.

Catalysts

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

• Analyst consensus expects revenue upside from new store openings and franchise reacquisitions, but this likely understates the impact from the Sports Direct rollout, which is set to transform Accent Group's scale over a multi-year horizon with at least 50 stores planned and early signs of strong brand-owner support, suggesting an accelerated step-change in group sales and earnings power.
  
• Analyst consensus highlights cost efficiency wins and higher-margin brand focus, but Accent's rapid growth in vertical owned brands (now over $130 million in sales, or 9% mix) and exclusive brands is set to deliver faster margin expansion than expected by further reducing competition, enhancing supply chain control, and supporting better pricing-driving sustainable gross and net margin improvement.
  
• The partnership-driven omni-channel and digital transformation, including loyalty initiatives and improved data analytics, will unlock higher average transaction values and drive best-in-class customer retention, providing ongoing double-digit uplift to revenue run-rates and margin resilience as consumers increasingly shop across digital and instore channels.
  
• Undeployed operating leverage following significant support office and back-end streamlining means Accent is poised to see meaningful EBIT margin expansion as sales rebound, even with ongoing investment in new banners, as revenue growth will far outstrip incremental cost increases.
  
• Accent's exposure to the rising global preference for athletic and casual footwear and the expanding streetwear/sneaker culture, along with an unmatched pipeline of exclusive brand partnerships (e.g. long-term Skechers, new Lacoste and Dickies, Hoka, Merrell), places the company to outgrow the market, secure premium pricing, and drive outsized revenue and earnings growth above sector averages over the coming years.

Accent Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Accent Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Accent Group's revenue will grow by 8.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.9% today to 5.8% in 3 years time.
• The bullish analysts expect earnings to reach A$110.5 million (and earnings per share of A$0.18) by about August 2028, up from A$57.7 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 bullish analyst cohort, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, up from 14.7x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 6.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Accent Group Future Earnings Per Share Growth

Risks

• Accent Group's heavy investment in new store openings and ongoing high store lease commitments could face structural headwinds as consumer foot traffic continues to migrate online, leading to potential asset write-downs and compression of net margins in a more digital retail environment.
  
• Global brands are accelerating direct-to-consumer strategies and building their own e-commerce channels, which may undermine Accent Group's exclusive distribution agreements and result in reduced gross profit and topline revenue over time.
  
• Ongoing cost-of-living pressures may drive consumers to downtrade or reduce discretionary spending, increasing pressure on sales volumes and limiting the company's revenue growth, especially in its lifestyle banners that have already shown softness.
  
• Margin pressures are evident, with gross margins declining in the latest period due to a more promotional environment and inflationary pressures on store wages and rents, signaling ongoing risks to net profit as competition, wage, and occupancy costs rise.
  
• The company's need to comply with increasing regulatory and ESG standards, as well as to manage supply chain disruption and input cost inflation, is likely to drive up operating costs and further erode net margins, challenging Accent Group's ability to sustain earnings growth.

Valuation

• The assumed bullish price target for Accent Group is A$2.2, which represents two standard deviations above the consensus price target of A$1.69. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.3, and the most bearish reporting a price target of just A$1.25.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be A$1.9 billion, earnings will come to A$110.5 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of A$1.41, the bullish analyst price target of A$2.2 is 35.9% 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.