Footprints of Excellence: Accent Group Paves a Road to Victory

Emerging from modest origins in 1988, Accent Group Limited initiated its journey as a wholesale distributor rooted in New Zealand. Presently, it stands tall as the proprietor of over 800 stores, embracing 34 distinct brands and commanding 35 online platforms.

While the name Accent Group might not ring a bell immediately, if you call Australia home, chances are you’re already acquainted with the plethora of brands sheltered beneath its expansive umbrella. Think The Athlete’s Foot, Platypus, Hype DC, Skechers, Timberlands, Sneaker Lab, and that’s just the tip of the iceberg.

Accent Group Limited has retained its place within my investment portfolio since I embarked on my investing journey into the stock market. During the upheaval of 2020 caused by the pandemic, the stock faced a daunting 73% slump.

I am proud to admit that I held steadfastly without relinquishing my shares. Foolish maybe, but that is a testament to my faith in the business. Although, in the grand tapestry of hindsight, certainties about the unfolding events are any fools guess.

As cliched as it may sound while I did purchase more shares, my only lament was not buying more. My rationale, in my defense, pivots around the whole stock market nose diving. I was limited to the amount of capital available to invest with.

Regardless of what has happened or will happen, this story is a testament to my strategy of long-term investing. That is I buy stocks with the intention to hold and I think about these stocks as a business.

So what now for Accent Group – What does the future hold for a shoe company in an environment with rising cost of living pressures?

Accent Group Stellar 2023 Performance

2023 Accent Group performance has taken center stage for shareholders. In an arena where consumer discretionary firms and financial institutions unveil their fiscal tales, and a unifying narrative emerges. The narrative sculpted by the forces of escalating inflation and interest rates, casting a shadow on consumer expenditure.

As we delve into the stories of these corporate protagonists, Adairs takes its place with a modest upturn in revenue, entwined with slight margin declines.

Meanwhile, Coles Group assumes the spotlight with augmented profits, yet the script embedded in their statements whispers of amplified expenditures – wages, procurement, warehousing – a crescendo of costs.

JB Hi-Fi’s tale, though tinged with subdued growth and gentle EBIT and net profit reductions, harmonizes in this chorus.

In this intricate dance of numbers, a common theme unfurls – the terrain of commerce is growing steeper. To layer complexity upon complexity, the surge in interest rates unfurls its script, siphoning discretionary spending from the economic stage.

Accent Group on the other hand provided the following key highlights to investors:

• Revenue from ordinary activities up 25.7% to $1.42 billion
• EBIT up 122.9% to $138.8 million
• Profit after tax up 181.8% to $88.6 million
• EPS up 178.1% of 16.16 cents
• Financial year dividend 17.5 cents per share up169.2%
• Inventory below prior year and stock levels clean

Yet, let us refrain from elevating Accent Group as a solitary luminary against the darkness. This is not a tale of exceptionalism; it’s a tale of acknowledgment for what has been achieved. The resounding achievement in the face of economic tempests cannot be brushed aside lightly.

As with any narrative, the cautionary note resounds – the past doesn’t definitively shape the future. But if one were to traverse the path of optimism, the tale of management’s capabilities, etched in proven history, is one worth holding in high regard.

Accent Group – Past, Present and Future

What initially caught my attention about Accent Group wasn’t the company itself. It was the ubiquitous presence of shoes in almost everyone’s life, myself included. And trust me, that’s putting it mildly.

You see, I’m what you’d call a “three-pair-shoes” kind of person. One for the daily grind, one for the gym grind, and one for painting the town red. I wear these trusty companions until the soles wave their final farewell. Now, it doesn’t take a rocket scientist to realize that not everyone follows my shoe-stepping rhythm.

In fact, I’m well aware I’m in the minority. The silver lining? Most folks out there are head over heels for their shoes, and I have a hunch their collection undergoes a wardrobe change more frequently than mine.

This train of thought turned into a pivotal moment when I decided to take my first investment plunge into Accent Group. And let me tell you, that move has paid off sweetly since the very beginning.

Over the course of six years, Accent Group has managed to script five chapters of profit growth for its shareholders. Since 2013, the sum total of annualized returns for shareholders stands at an impressive 20.9%, leaving the ASX200’s 10.1% in its wake.

In the realm of business, enhancing performance can either be credited to a stroke of luck or astute management. The melody of Accent Group’s unwavering growth while keeping a firm grip on expenses sings of a robust foundation and steady direction.

Accent Group Annual Margins

	2015	2016	2017	2018	2019	2020	2021	2022	2023
Gross margin	58%	54%	55%	57%	57%	57%	57%	55.3%	56%
Net margin	8%	7%	5%	6%	7%	7%	8%	3%	6%
ROE	4%	10%	8%	11%	13%	14%	18%	7%	20%
Capex/Revenue	3%	4%	4%	2%	3%	3%	3%	3%	2%
FCF/Revenue	3%	6%	3%	8%	5%	17%	13%	8%	16%
Dividend/Net Income	114%	78%	111%	74%	83%	88%	85%	99%	99%
Dividend/FCF	273%	84%	151%	60%	110%	34%	49%	31%	38%

Taking a stroll down memory lane to 2015, it’s evident that Accent Group’s margins have held steady. While there have been instances of outlier performances, the average paints a picture of predictability.

This isn’t to imply that history’s script will be replayed in the future. However, drawing upon accumulated insights, one could make a reasoned guess that margins might continue to follow a similar trajectory.

Positioned as the frontrunner in the youth lifestyle and performance market, Accent Group commands attention. Notably, their robust foundation is built upon a blossoming customer base, presently at 9.8 million reachable customers.

The dynamic duo of a market-leading digital presence, sporting 35 websites, and an expansive network of over 800 physical stores, propels them as an imposing force in Australia’s retail landscape. Should their dominance hold, I envision the potential for sustained growth to grace their journey over the long haul.

Accent Group Valuation and Forecasts

I am a big believer in the concept of asymmetric risk and reward. Meaning that when I make an investment, my upside potential is large and risk is low. But, hold on, don’t misconstrue this as a ticket for me to either lose everything or make a fortune that multiplies a hundredfold.

It means that there might be a chance I could lose a small portion of my investment, but the flip side is that there’s a chance for significant gains as well. This thought pattern has been echoed by seasoned investors who often refer to it as the “margin of safety.” The real trick here lies in being able to accurately put a value on the business – that’s where the margin of safety comes into play.

A great investment ceases to be great when a too high price has been paid for it. You should never put yourself in a position where your risk is 100% of your capital.

While I think Accent Group is a good business to hold, it is still a discretionary business. There’s a certain price point beyond which it might not be the wisest move to make a purchase. It’s like searching for the right price tag that makes it a sensible investment.

Discounted Cash Flow (DCF)

Although DCFs (Discounted Cash Flows) might not be flawless, I find them pretty useful. Going through the motions of this process prompts you, the investor, to ponder on the pieces that need to align for your valuation to fall into place.

Now, for our little exercise, we’ll be using the levered discounted free cash model. Why? Well, because Accent Group has a bit of debt chilling on its balance sheet. So, I’m inclined to appraise its cash flow after it’s dealt with its debt responsibilities.

We can roughly assume a free cashflow to revenue percentage from an average over the last five years. I tend to stray on a cautious side and pick a lower rate.

We also have to take into account the fact that inflation may stay at elevated levels, which is why I have opted for a 15% discount rate.

Based on my assumptions, the DCF has given a fair value of $3.55

PE Valuation

PE Valuation is a quite valuation method you can perform to roughly gauge a stocks worth. It is also easy because PE ratios are simple to understand. And even the most novice of investors will be familiar with.

Once you have made a suitable forecast you simply divide the net profit by total shares outstanding to get the earnings per share. Lastly, a PE multiple assumption to calculate the fair price the market will pay.

The PE valuation shows that Accent Group with a PE of 20 will be valued at $3.49. This value reflects the DCF above.

As we have already mentioned, valuations are only as good as the values inputted. So play around with your own valuations, I guarantee it will be completely different to mine

Key Takeaways

• Accent Group has continued its path to growth despite a challenging environment. This may attributed to a capable management with shareholder alignment.
• Group margins are fairly predictable, but margins may be impacted from softer economic spending. Proceed with caution when making investments in highly cyclical industries
• Current valuation of $3.50 hints that Accent Group may be undervalued at $2.12

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