25-June-2020: Business and trading update
AX1 is up by around 10% at 2pm - on a day when the market is down by a fair whack - ~2%. Excellent Management at Accent Group!
1 stock I have been quietly accumulating more of over the last week or so is Accent Group. I have owned stock in AX1, formerly RCG for around 3 years in my personal portfolio from an average buy price of around $0.63.
The company has been executing well on its strategy of corporatising core TAF stores as well as opening new outlets and LFL sales have been tracking favourably. I would point out that it seems LFL sales increases may in fact be driven as much by price as volume, as the company has boasted its strategy moving away from product discounting as a driver of growth. I think given the brand profile of AX1 that this is the correct strategy, really the company does not compete on price and sells products where consumers can generally wait for sales if they are sure one will be forthcoming.
1H20 produced revenue of $454m, up 13.6% on pcp; $33.6m NPAT on net margin of 7.39% slightly down on 1H19. Gross margins of 57.7% were also slightly lower and the company has linked this to rises in the USD/AUD pair. AX1 holds currency hedges to minimise the impact of this and improve their visibility over earnings however with the AUD currently trading below 60 US cents, I am expecting slightly lower margins from this fact ongoing.
As at 29 December 2019 the group holds $44.0m cash. Accent group shows a $58.6m non-cash working capital deficit which could quite quickly place some strain on the cash position. $20.0m of this is borrowings needing repaid as well as a large $88m leasing liability. On trade payables/receivables alone there is a deficit of $103m, in addition to $5.5m in unearned revenue. The company has done well to review operations and the likely impact of COVID-19 at a time where LFL sales had been only 1.2% lower than prior year. Some of the thesis for AX1 relies on them being able to pull some cash lever to survive. Lenders have previously been supportive, and the company has stated in recent trading update that they are in preliminary discussion with landlords regarding ongoing leasing obligations. The company have stated a clear intention to conduct sales via their well-established online channel and this has been a focal point for some time prior to COVID-19, though it is unclear how the company may be impacted by wider consumer sentiment with so many jobless claims coming to light currently in Australia. Given AX1 boasts a typically younger consumer base, there is certainly some risk that casual employees or hospitality and tourism workers are overrepresented within their usual clientele and sales may be impacted by this potentially well beyond the period of any shutdown or lock-in. If sales are materially damaged, it is my hope that the company will be able to lower inventory for a time. Currently they are holding $164m or 66 days and state no supply chain issues to date. There is potentially opportunity for them to delay any purchasing of franchisee operated businesses if they need to, or perhaps to refinance in aid of these buybacks at a potentially opportune time. They have been able to secure finance for this purpose specifically in the past.
The balance sheet also shows an additional $71.0m in longer-term debt. Covenants on this debt, as always, are unknown though maturity of this is August 2023 and as stated prevously, llenders have been supportive to Accent Group ito date.
At today's close of $0.62, AX1 trades at around 5x trailing earnings, 5.5x FCF on 14% fully franked dividend. These figures are gone, for the short-term at least, though I think the current price on offer, down >70% off recent highs and following a stellar HY report, is certainly compelling. I think that the company's balance sheet offers enough optionality for them to make it through the extent of this disruption in the short-term. It is also worth noting that the company, unlike many other retailers, does have optionality with its brands to respond to long-term shifts in consumer behaviour. I would think in this case though that the transition period would be brutal on investors and deterioration of any of the underlying brands I would defitinitely see as a negative.
At current prices, I think the reward for being correct is enough to justify risk and until further information comes to light to suggest otherwise, I am cautiously optimistic on Accent Group.
20-Feb-2020: Accent Group (AX1), a company I've made money with before - but haven't been following lately (or invested in for over a year), reported their first half results yesterday (AFTER the market closed):
19-Feb-2020: FY20 Half Year Results Announcement
AX1 is covered by Citi, Morgans, and Morgan Stanley, and they are all bullish. Citi have a "Buy" call with a $1.95 TP (AX1 shot through that today!). Morgans have an "Add" call with a $2.15 TP. Morgan Stanley have an "Overweight" call on AX1 and a TP (target price) of $2.30. Those are all current as of today's updates from each of them to their clients, post last night's results from AX1. Morgans have upgraded AX1 from a "Hold" to "Add", but otherwise those target prices and calls remain unchanged from before the results were announced, i.e. all three brokers were already bullish (except Morgans who were neutral before and are now moderately bullish). AX1 have risen +10% today (to $2.13) on the back of all that.
It wasn't a bad set of numbers:
The dividend increase would be especially welcome for income-focussed investors.
Excerpt from last night's results announcement (link to full announcement at top of this straw):
Accent Group Limited (ASX: AX1) today reports H1 FY20 Net Profit After Tax up 9.7% to $35.3 million. EBITDA grew by 10.5% to $67.7 million. This result was achieved through strong sales growth from digital and new stores, profit growth in The Athletes Foot (TAF), underlying gross margin improvement and a focus on cost of doing business. Whilst the headline gross margin was below the prior year, this result was solid given the FX headwinds (H1 currency impact of 120bp) and more significantly the highly competitive market environment driven by the Cyber events in November. The gross margin impact to EBIT margin was largely offset by improvements in cost of doing business.
Accent Group CEO, Daniel Agostinelli, said “We are pleased to have delivered strong sales and earnings growth in a challenging environment. The strength of the Group’s digitally integrated business model, along with the ongoing focus and investment on innovation in digital and store formats, continues to drive growth."
--- click on link above for more ---
I don't currently hold any AX1, but results like this make me wish I did. CEO Daniel Agostinelli's good mate Brett Blundy (best known for his Lovisa stores, ASX:LOV) is now on the AX1 board and also owns 18% of the company (97.54 million AX1 shares) and was the main driver behind installing Agostinelli in the top job at AX1, and it seems to be going reasonably well now, after that little hiccup (sell-off) in the final three months of 2018 when the SP appeared to have gotten ahead of itself - at $1.60 to $1.65. They're now back up to $2.13, with plenty of momentum. I'm not sure of what they're actually worth (intrinsic value), but they're obviously worth as much as $2.13 to somebody! Could be a decent momentum trade if they keep rising.
27-Apr-2020: Business Update
DIGITAL SALES SURGE AND ALL STORES REOPENING WITH NEW SAFETY PROTOCOLS
On 25 March 2020, Accent Group Limited (AX1) announced the closure of Company owned stores in Australia (Group Stores) from 5pm on 27 March 2020 for a period of 4 weeks. Today, we are pleased to provide a further business update, including the significant acceleration we have seen in digital sales, and to announce our plans to progressively re-open our stores in compliance with Government directives and with the safety of our team and our customers our priority.
Digital sales surge
Continuing its 5 year investment and further energised focus on digital, Accent Group has seen a surge in the Company’s digital sales. Digital sales have grown from an average of approximately $250,000 per day prior to our stores closing in March, to between $800,000 and $1.1 million per day for the last 2 weeks of April.
Whilst our stores were closed to the public during April, some Group Stores were opened and staffed to operate as ‘dark stores’ [stores closed for trade to the public and used as fulfillment points for digital click-and-dispatch to customers] using our endless aisle technology to access our entire inventory base and to enable click-and-dispatch of product to our customers. Our digital business has also responded to this shift in consumer behaviour with targeted consumer content and offers to drive traffic and conversion. As our digital sales continued to escalate, the number of Group Stores opened as dark stores increased progressively through April. All of our Group Stores and a number of our NZ company owned stores are now staffed and operating as dark stores, working together with our distribution centres to fulfil our digital sales.
During this period, we have also developed and implemented new in-store protocols to help ensure a safe working environment for our team members working in our dark stores.
Accent Group CEO, Daniel Agostinelli said “After years of investment by Accent Group in our digital team and technology, I am delighted with the growth in our digital sales. It is clear that there has been a seismic and most likely enduring shift in consumer behaviour away from traditional shopping centres to shopping online. With 18 websites and our leading digital capability, Accent Group is capitalising on this trend. We will continue to drive digital growth as the number one priority in our company.”
Re-opening stores and new safety protocols
In Australia, shopping centres have been required to implement the Government’s measures to manage the COVID-19 virus (such as social distancing and public gathering measures) but have remained open. Whilst many stores in shopping centres have temporarily shut during the COVID-19 pandemic period, a number of retailers have also continued trading in the centres where the Company’s stores are located.
During this time, we have seen an increased demand for footwear for essential workers, such as the Skechers range for health professionals. We are also seeing strong demand for active footwear and apparel as more people are taking part in physical activities, with strong trading in these categories, particularly on The Athlete’s Foot and Stylerunner websites.
Accordingly, we have made the decision to progressively re-open all Group Stores with our new safety protocols in place to comply with all Government directives and to prioritise the health and safety of our team members and our customers. We will review and adapt these in-store measures as the environment evolves.
The initial protocols will include:
These protocols have been trialled successfully in several stores over the last 2 weeks and we will now be progressively re-opening all Group Stores to the public by May 11.
We believe that the significant increase in our online business most likely marks a permanent shift in consumer habits in Australia and NZ and we expect our online sales to represent a much larger share of our total sales in the future. Our store network, along with our surging online business, is a fundamental competitive advantage to the Company, however we will not operate stores on unsustainable or uneconomic rental deals. Accordingly, in the coming months, we will be re-evaluating the location, size and format of our store network to ensure the appropriate balance between digital and store sales.
--- click on link above for full announcement - including:
--- AX1 closed at $1.045 today, up +16%, but were up +36% earlier (at $1.28).
26-Mar-2020: COVID-19 Update
Accent Group (AX1) will now close all stores in the Group from 5pm on Friday 27 March 2020 (tomorrow) for a period of 4 weeks. This also means that all of the Company’s retail employees and the majority of support office employees will be stood down without pay for that period. The Group will continue to trade through its 18 websites and wholesale business.
During the stand down period, employees will continue to accrue entitlements and may access their annual and long service leave entitlements.
Accent Group CEO Daniel Agostinelli said “It is with a heavy heart that we have made this decision, but we believe this to be in the best interests of the health and wellbeing of our team members. The Company intends to do everything possible to return the business to normal operations when environmental conditions normalise whilst always prioritising the safety and wellbeing of our team”.
[click on link above for more]
What I'm noticing more recently is the market's various reactions to these updates, and to guidance withdrawals, to the cancellation or deferral of dividend payments, etc. Increasingly, the share prices of these companies actually rise on these announcements (as the AX1 SP has done so far today - up +2%). Not all companies, but a good number.
What that suggests is that the downside was already priced in, and so it's a case of "sell on the rumour, buy on the fact". It's the inverse of what happens when good news is expected, an example being that when a massive stimulus package is expected to be announced in the US, the DOW might rally 10%, and then do next to nothing or fall when the actual package is announced (because the upside had already been priced in, and then some). That's "buy on the rumour, sell on the fact".
But my point is that it is increasingly looking like the downside is already priced in for a number of ASX-listed companies, as evidenced by them not falling any further when they announce negative news that would usually cause their share price to fall further.