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.
