Accent Group Limited (AX1) Earnings Call Transcript

Good morning, and welcome to the Accent Group's First Half FY '20 Results Conference Call. I would like to introduce you to the CEO of Accent Group, Daniel Agostinelli. Thank you, Daniel. Go ahead.

Good morning, everyone, and thank you for taking the time to attend the call today. I'm joined on the call by our group CFO, Matthew Durbin. We will now take you through the results for the half year ended 29th of December 2019, an update on our growth plan and the outlook for H2 FY '20. There will be an opportunity to ask questions at the end. If I can refer you to Page 3 of our investor presentation, which was released to the ASX yesterday evening, let me begin by saying how delighted I am that Accent Group has delivered another half of record profit with comparable pre-AASB 16 EBITDA up 10.5% to $67.7 million and comparable net profit after tax up 9.7% to $35.3 million. The Board has declared an interim dividend of $5.25 fully franked, an increase of more than 16% on FY '19. Now turning to Page 4. Some of the key operating highlights for the year include the opening of 51 new stores, including a number of brand-new formats and further stores open for the Trybe business. Digital sales growth up 33%, underlying gross profit margin improvement of 60 basis points and strong cost of doing business management. 66 of The Athlete's Foot corporate stores are now owned with the successful back-to-school period complete, growth in the Skechers brand globally and in Australia, continued performance of our vertical products with new products and ranges launched in The Athlete's Foot, the Trybe, Hype and Platypus. The acquisition of Stylerunner, which gives us an entry into the fast-growing women's athleisure segment. In summary, the company continues to deliver against its key growing objectives. It's been another strong half, and I continue to be excited about the opportunities ahead for our business. I will now hand you over to Matthew Durbin to talk about the details of the results. Thanks, Matt.

Thanks, Daniel. If you could please turn to Page 5, which includes a summary of financial performance. I'd like to highlight upfront that the results here are presented on a pre-AASB 16 basis, which allows the most direct comparison with the reported results last year. No other adjustments have been made from the statutory results. Company-owned sales for the half were up 14.1% with like-for-like sales up 2.4%. Gross margin percentage was below prior year due to market conditions, including the impact of AUD, USD exchange rates and the competitive environment experienced from the cyber weekend in late November through to December. Currency impact alone in the half was 120 basis points. And on this basis, underlying gross margin actually increased by a further 60 basis points over H1 last year, driven by the continued focus on distributed brands and vertical products. Our inventory position remains clean with aged inventory levels below prior year. Total inventory was above prior year, predominantly due to the inventory investment in 51 new stores, the growth in half corporate store numbers and the growth in distributed brands stock in transit, which shipped earlier this year due to the forward movement in Chinese New Year. Cost of doing business percentage to sales improved by 50 basis points due to our ongoing focus on cost of doing business, including 10 productivity sustainable lease renewals and operating leverage from new stores and the TAF's corporate stores acquired. Now if you could please turn to Page 7 of the presentation, which deals with retail performance. Owned retail sales were up 15.4% to $382 million, with strong growth from digital and new stores. Inclusive of The Athlete's Foot franchise stores, the group now operates over 522 stores. In the retail banners, Platypus, Skechers, Vans and Dr. Martens continue to be standout performers for delivering strong growth. The other brands traded broadly in line with plan. Hype remains a key focus with initiatives underway to improve our brand differentiation. In The Athlete's Foot, sales were ahead of last year on a total and like-for-like store basis. During the half, we opened 51 new stores across all formats and closed 8 stores where sustainable renewal terms could not be agreed. The chart on the left-hand side of that page demonstrates the continued growth in our store network, and we've provided a breakdown on Page 21. Now turning to digital on Page 8. Digital sales grew by 33% on top of the 94% growth achieved in half 1 FY '19. The group now has 19 websites, including Cremm and Stylerunner. TAF digital sales continue to grow strongly, up 44%. We continue to leverage the strength at now more than 500 strong distribution points through our store network to deliver a comprehensive, fast omnichannel experience for our customers. Customer database also continued to grow, reaching 6.2 million customers. The next phase of growth in digital includes continued focus on the utilization of data from our loyal customers, leveraging new customer targeting and communications capability. On to wholesale and brand performance on Page 10. Wholesale sales grew by 6.7% to $62.2 million, with strong performance in Skechers, Vans, Dr. Martens and Merrell. It is a reflection of the global and local strength of the Skechers brand that this brand grew in wholesale, whilst Accent continued to grow Skechers in digital and rolled out 16 net new stores. We are delighted with the performance of our new vertical products, which are on track to generate at least $15 million in sales in FY '20. This program has played a key role in the continued growth of our underlying gross margin improvement. Turning now to our growth plan on Pages 12 to 4 (sic) [ 14 ]. The growth initiatives outlined at our FY '19 full year results are well on track. In FY '20, we now plan to open more than 70 new stores and continue to see the potential for a further 30 to 40 stores over the next 2 to 3 years across Australia and New Zealand. Performance of the new stores opened continues to be strong, and the increased openings for FY '20 are reflective of the quality of the rent deals that are available to Accent from landlords. The Athlete's Foot corporate store program is on track with 66 corporate stores owned at the end of the half, and we expect to have around 70 corporate stores by the end of FY 2020. The store gross margin of the corporate stores acquired and opened continues to grow as we introduce our vertical brands and products. Having completed the key Christmas and back-to-school trading period, The Athlete's Foot performance through this period is in line with our expectations, and comp and total sales were above prior year, also cycling strong comp growth from the previous year. We expect the corporate store strategy will add positively to group profit in FY '20 as it did in the first half. Digital continues to grow strongly with ongoing investment in our omnichannel capability and customer personalization and engagement tools. In November, we launched Cremm, premium curated footwear marketplace, and we continue to target 20% of sales to come from digital within the next 3 years. Our vertical product strategy is on track to deliver $15 million of sales in FY '20. In November and early December, we launched Shubar in Hype, a vertical accessories program in Trybe, performance socks and Alpha school shoes in The Athlete's Foot and new accessories ranges in Hype and Platypus. We now have 7 Trybe stores trading plus online. These stores have resonated with our customers and performed in line with expectations through the important Christmas and back-to-school trading period. We intend to continue to roll out with more stores planned this year. The PIVOT strategy is also well progressed, and we are on track to launch our first store in Shellharbour in New South Wales in late April. In terms of Stylerunner, we're pleased with the early results from the Stylerunner business acquired in late November with great focus from the team on getting back in stock, customer focused and getting this business back to a full price premium position. Finally, we would like to discuss dividends, current trading and our outlook for the balance for FY '20, which you can find on Slide 16. The Board has declared a final dividend of $5.25 per share, fully franked, an increase of 16.7% on H1 FY '19. The dividend growth reflects strength in the first half results and confidence in the company's future growth plans. Regarding trade, we are pleased with early trade in the second half. For the first 7 weeks, like-for-like sales are up 3%. We continue to expect profit growth in half 2, delivered through low single-digit comp growth, including strong digital sales, the sales from at least 17 new stores and the annualization of stores opened last year and growth from the TAF business. Gross margin pressure continues due to the USD exchange rate and the competitive environment. Our strong focus on cost of doing business continues. In conclusion, we remain excited about the opportunities ahead for the company. Now I'd like to open up to any questions that the group might have. Thank you for your time.

[Operator Instructions] Our first question is from Ray [indiscernible]

Daniel and Matt, you might remember, I' also a [indiscernible] member attended the AGM. So thanks very much for the early posting. I wish a few more companies would do that. It just makes it so much easier to have a less rushed look through the paperwork. Only one question. Last week, I bought some shoes in the TAF Elizabeth Street store and I...

I'm sorry, Ray actually must have pressed a button and he's gone off-line. So hopefully, he comes back on. Now we'll take Sam Teeger from Citibank.

Yes, I just like to second the comment made before. Yes, the earlier posting of the result last night is definitely appreciated and helps us go through it in more detail. Look, your first question, maybe just a more general question for Daniel. Just keen to get your thoughts on whether you know then the cyber promotions are bad for the retail industry in general? You can see what's happening to your gross margins. You then got another big event a month later due to -- with Christmas and then you potentially have a pull forward for the next couple of months. Just keen to your thoughts on that?

Sam, yes, I'm not sure it's great for any of us because, at the end of the day, it all leads to some sort of discounting added value, which is not where we want to play. But to hold market share, you sort of got to do a little bit of that. From our point of view, there's definitely a shift in how customers shop without any doubt. We had a fantastic week there, obviously, as did many others as -- from what we're hearing in the market. And then week 1 of December was okay, followed by a really, really tight week 2, 3 and 4 of December. So there was a major shift. And then, of course, Boxing Day come along and was just through the roof. So there's a different pattern going on in how customers shop. And your question is whether it's good for business. I'm not so sure. However, we are already planning to get involved in a much bigger way for November given that's what customers are doing, but we have a major focus on engineered products for this November.

Right. So you think this November, you might see less hit to your margin?

That's absolutely the plan. It all depends on what our stocks look like at that time of the year. But without any doubt, the opportunity is there. We'd just now go to master how we deliver through that whilst holding margin more so than the year prior. And the focus, like it is in every other part of the business, Sam, is continuous improvement, and we will apply that strategy to what we do for this November.

Got it. And so you extended some of your distribution agreements. Can you talk about what minimal annual buys you're committing to with the brand parents when you are extending these agreements?

It's -- yes, there are minimum buys from all of these brands. We've actually never really missed a minimum buy. They're quite -- they're very pragmatic when they give us these minimum -- these minimums. Because one of the things these big brands of the world do is they don't want to see us flood the market just to get a sale. So all as I can say is that they're no worse than they've ever been. They understand that what CPI is doing in this country and the minimums are sort of in line with that.

Yes. Do you think you could hit these minimums if you stopped rolling out stores?

Yes, I do. Absolutely. We've got a -- we've signed a, whatever it was, a 10-year new deal with Skechers. And some of those minimums were hit long, long ago. And we really don't have too much of a focus there. In terms of -- it's not a worry area for us. So I guess, Sam, that's the last thing we need to do. We're more interested in doing the right thing by the brand with its marketing and making sure that the distribution channels are correct, which is exactly what they push us to do.

Sure. And then last question. Yes, just keen to get your updated thinking regarding the company's international aspirations.

Sam, we continue to be asked to do something by our brands, by many people that approach us. But the focus for us, in my view, is that we can do a better job here in the short term. I'm quite excited about PIVOT. Although we've got nothing on the ground yet, we're excited by how it's coming together. I'm not sure how that's going to -- what's going to happen there, but there's definitely a rollout opportunity if we get it right. And we continue to see strength in our Skechers business, which we will roll out more stores this year. And our Skechers big box business, which we have 2 at the moment, [indiscernible] and although not performing miles ahead of expectation. So we see opportunity there. So it's kind of like, well, where do we focus? Do we get it right further in Australia and New Zealand, which is what we're focused on? Although we try and do both. As CEO, I would lean towards, let's get Australia and New Zealand right first.

Right. And how long do you think that would take before you get Australia and New Zealand right or you kind of maximize all your opportunities here? Getting it done in a year then you look international or it's longer than that?

I think it's going to be between 12 and 18 months. And who knows what comes our way in that time. As you can see, there's some news going on in the market with -- not that way we're looking at anything, but there's acquisition opportunities. There's many of our brands that we could go further. If you take Dr. Martens, which is performing in an outstanding manner at the moment, we've only got 5 or 6 stores. Could we put 30 of those stores up? So they're all the things going on in our strategy meetings. So international is always in the pipeline, but when and where we take a really good look at that remains to be seen, whilst we sort out what's happening in Australia and New Zealand.

Our next question is from Sam Haddad from Bell Potter.

Well done on a quite a resilient result considering the competitive backdrop.

Thanks, Sam.

Thanks.

Just on the gross margin equation, first of all, was that across most banners? Or did one banner drag more than the others?

No, Sam, it was across the board. And the drag was felt as we went into the back end of November and that the cyber events. And then certainly in the clearance and the sales post -- immediately post-Christmas. So it wasn't any particular banner. It was a broad-based impact. That makes sense?

Sure. And just further to your point, Daniel, about opportunity for the next Black Friday event. Is there opportunity also to work with your suppliers for them to sort of take some of the burden off you in terms of the gross margin impact?