Accent Group Limited (AX1) Earnings Call Transcript

Welcome to the Accent Group FY '21 Full Year Results Investor Call. We have Daniel Agostinelli, Group CEO; and Matthew Durbin, Group COO and CFO with us this morning. [Operator Instructions] Thank you, Daniel. Over to you.

Thank you. Good morning, everyone, and thank you for taking the time to attend the call today. I'm joined on the call today by our group CFO, Matthew Durbin. We will now take you through the results for the full year ended 27th of June 2021, an update on our growth plan and a trading update for the first 7 weeks of this year. There will be an opportunity to ask questions at the end. If I can now refer you to Page 4 of our investor presentation which was released to the ASX yesterday evening. Accent Group has delivered another record year of profit, with EBIT up 32.1% to $124.9 million and net profit after tax up 38.6% to $79.9 million. I am delighted with the results. And first and foremost, I would like to acknowledge the performance and contribution of the entire...

Apologies. We've just lost the host's line. Please hold and I'll connect them through again. [Technical Difficulty] Thank you so much for waiting. We now have your host, Matt and Daniel, back on the line. Please go ahead, Daniel.

Apologies, we got some technical issues. I'll start at Accent Group has delivered another year of record profit, with EBIT up 32.1% to $124.9 million and net profit after tax up 38.6% to $76.9 million. I'm delighted with the results, and first and foremost, would like to acknowledge the performance and contribution of the entire Accent team for their efforts throughout what was a highly disruptive year. The group's strong focus on VIP, Vertical and Virtual, along with our integrated digital store operating model, have delivered another record trading-led profit. Turning to Page 5. Some of the key operating highlights for the year include: Record sales of $1.1 billion, exceeding $1 billion for the first time; digital sales growth of 48.5% on top of the 70% growth achieved in FY '20; online sales grew to nearly $210 million, opening 90 stores, including new store formats, growth of 1.6 million new contactable customers. Our database is now 8.4 million contactable customers. Continued growth and performance in Stylerunner with 4 stores now trading, and strong results from Stylerunner Vertical product. The acquisition of Glue Store and Trend Imports, which provides a very strong foothold in the Australian retail apparel market and a 100% growth in Vertical owned brands to $25.6 million; and the expansion of our key Skechers distribution agreement by 6 years to December 2032, demonstrating the strength of the partnership we have with them and the Skechers confidence in Accent in the ANZ market. I will now hand you over to Matthew Durbin to talk about the details of the results.

Thanks, Daniel. Turning to digital on Page 7. A key highlight of the year was the continued growth in digital, with online sales up almost 49% for the year, representing 21% of sales. This is on top of the nearly 70% growth achieved in FY '20. Part 2 digital growth of 16% was achieved against the significant growth in half FY '20, comping the impact of the [ 140% ] growth experienced in the [ COVID ] disrupted quarter 4 last year. Our digital infrastructure, which includes a flexible store or warehouse performance model and multiple customer delivery offers, continued to deliver a competitive advantage. The average customer delivery time through our normal channels is less than 2 days and within a day through our various express channels. Pleasingly, we continue to see year-on-year growth in site traffic conversion rates and average order value. On to Virtual and VIP on Slide 8. Our contactable customer base grew by 1.6 million customers to 8.4 million customers. This continued to be the result of a strong drive to invite customers to join, install, also our new Skechers loyalty program and in the outlets, the strength of our market rewards program. The new Skechers loyalty program launched in May with strong early results, 250,000 new customers joined the program in the first [ 12 ] months. In the standing start in April last year, Virtual sales driven through calls, chat and the Hero video app have grown significantly, achieving sales of $6.3 million in the year. A new customer experience in Virtual sales hub pictured on the slide launched in May this year. Moving on to Vertical on Slide 9. The company's Vertical product program continues to gain momentum with sales of $25.6 million, up more than 100% on the prior year. This result excludes Accent Lifestyle or Glue, which generated an additional [ $10 ] million in Vertical-owned brands sales just in June. The key drivers of growth in Vertical was Stylerunner, The Label, Alpha, ITNO. The [ SOP ] program includes Platypus, The Athlete's Foot and Hype, and the Athlete's Foot performance in sales. The company has 10 Vertical brands and is targeting at least $70 million in Vertical-owned sales in FY '22. Moving on to retail and wholesale sales on Slide 10. Owned retail sales were up 19.6% to $835 million, with strong growth from digital and new stores. Inclusive with the TAF franchise stores, the group now operates 638 stores, including 31 websites. In the retail, Vans, Hype DC, The Athlete's Foot, Platypus, Skechers, Trybe, Vans and Dr Martens were standout performers, with all other banners trading broadly with lot of expectations. During the year, we opened 90 new stores across all formats and closed 7 stores where sustainable renewal terms could not be agreed. The acquisition of Glue Store added 22 stores to the group and an additional 9 websites across the acquired vertical and distributed brands. The chart on the right of Page 10 demonstrates continued growth in our store network with a breakdown provided on Page 17. Moving on to wholesale. Wholesale sales were up 22% to $132 million which is a new record for Accent wholesale. New brand distribution agreements were signed with Herschel and HOKA during the year, with sales from these agreements to commence in H2 of FY '22. We're also pleased to report the early renewal extension of our key Skechers distribution agreement, which has been extended by 6 years to December 2032. Turning now to our growth plan update on Pages 11 to 14. Our growth plan is well on track and helped to deliver another year of record growth. The Stylerunner strategy on track with 4 stores, including online trading. Digital sales continue to grow. International shipping to the U.S.A., Singapore and Hong Kong is now available with strong early results. There is significant focus growing our vertical product mix through Stylerunner, The Label, Stylerunner accessories and Exie, and those brands have grown through around 20% of sales through Stylerunner. Gross margin in Stylerunner continues to improve due to this increased vertical mix. The results from the first 3 concept stores in [ Abada, Ribena and Miranda ] have been strong, and we expect to have at least 20 stores trading by early calendar '22. A total of 40 store locations have been identified to be trading by Christmas next year. We are targeting a network of 60 stores in Australia and New Zealand within the next 3 years. Moving on to Glue Store and our new Accent Lifestyle division. We provide a strong entry to the Australian net apparel market. Significant work is underlying gross margin improvement, leveraging broader Accent capabilities, including continued growth in strong portfolio of Vertical-owned brands, which are targeted to grow to 40% of sales over time. A new world-class store concept has been developed in 4 new [indiscernible] [ July ] with it's new design concept before Christmas. We are targeting a network of at least 60 stores by 2023. Digital continues to grow strongly with ongoing investment in our integrated omnichannel capability and customer engagement initiatives. Digital sales for FY '21 represented more than 20% of sales, giving us confidence that we are on track to achieve 30% of sales over time. This result is particularly pleasing in light of the strong digital margin growth achieved and the significant number of physical stores opened during the year. The project to build and deploy new websites for our major banners on the latest agenda 2 platform is well progressed with a new Hype site to launch prior to November and other sites, including Platypus and Skechers to roll out progressively through the year. These new sites will provide further benefits in site spending capacity, driving improved conversion rates. Our new virtual sales hub is operational in May, providing the infrastructure for a virtual video shopping experience to customers across our major banners. We're targeting virtual sales of more than $10 million in FY '22. We are paying royalty. With contactable customers at 8.4 million, we are well progressed towards our target of 10 million contactable customers. And the Skechers loyalty program has been well received with 250,000 new members to this program since it launched in May. Both Platypus and Hype loyalty programs will launch in FY '22. New stores. The pipeline of new stores remains strong with at least 65 new stores expected to open in FY '22 across all banners. This program reflects the continued quality of the deals available, and our rollout plans of Stylerunner and Glue gaining momentum. New store performance where we were able to open up [indiscernible] continues to be strong and ahead of the plan. The Athlete's Foot franchise buyback program continues with targeted stores being progressively acquired. The Athlete's Foot had a record year of sales and profit. Vertical. Our Vertical program continues to gain momentum with FY '21 sales of nearly $26 million. This is expected to grow to more than $70 million in FY '22 as the Accent program gains momentum and we see new sales growth from Stylerunner, The Label, Exie, Mindful department, and Accent Lifestyle, including Nude Lucy, Beyond Her, Lulu & Rose, Henley's, Article No 1 and [indiscernible]. Margins continue to grow on this product as we grow volumes and improve our ethical sourcing capability. We anticipate Vertical sales were growing at least 10% of sales well ahead of our original time line. PIVOT and Trybe. The PIVOT store rollout is on track with 15 stores expected to be opened by December. Performance in Trybe has been strong, with 66.4% sales growth for the year. The Trybe store rollout has recommenced and will ramp up in FY '22. Turning to Slide 15 to discuss dividends and trading update. The Board have recommended a final dividend of [ $0.0325 ] per share fully franked, bringing total dividends for the year to $0.1125 per share, a 35% increase in the prior year. In recommending the final dividend, the Board determined that no residual [indiscernible] subsidy funds were required to use or used to calculate or pay the final dividend. Indeed, these will be fully deployed by July. Trade in the first 7 weeks have been impacted by store closures due to government-mandated lockdowns in Victoria, New South Wales, Queensland, South Australia and the ACT. The group currently has more than 350 stores or 55% of it's portfolio closed for trade. In most cases, they're operating a dark store to [indiscernible] online orders. As a direct result of these closures, LFL sales, including digital for the first 7 weeks, were down 16%. Digital sales in the last 3 weeks with both Melbourne and Sydney closed have ramped up and were up 66.4% on the prior year. The company estimates the impact of group EBIT of the COVID-related store closures across July and August will be at least minus $15 million to expectations. This impact is the result of both lost sales and the impact to gross margin of driving sales and ensuring that inventory levels are appropriately managed. Company has implemented a range of inventory management cost saving measures across the business. Having said this, we're also continuing to invest for the growth and the future in new stores, digital capability and our new business formats. Due to the continuation of COVID-19 and the inherent uncertain environment, the company will not be providing guidance for the full year. I'll hand back to Daniel now to wrap up.

In the current environment, we remain cautious and expect the current lockdown situation to be temporary [indiscernible] in the near term. Our digital sales are growing strongly. We have a strong, conservatively geared balance sheet, and we have confidence that when we reopen stores, demand will be very strong, and we would be well positioned to accelerate the strong inventory levels in many new stores. We are very excited about the opportunities ahead for both our core brands and the growth path of Stylerunner and Glue, which are both planned to ramp up over the coming 12 months. That concludes our presentation today, and we'll be happy to take any questions you may have.

[Operator Instructions] We have our first question from Sam Teeger from Citi.

Sam, apologies for the technical difficulties earlier. Did you manage to get on okay?

Yes. I've heard most of it. Thanks very much, Matt.

Okay.

Get a bit of an update around the latest round of landlord negotiation? And to what extent do you guys think you're going to be getting more of that on deferrals? And given what's happening, what are you seeing as a fair outcome for both retailers and landlords?

Sam, at the moment, landlords like us, I'm not quite sure when all this will end. We've had lots of dialogue with all of our landlord partners. And at this stage, it's essentially part to figure out how long this will go for. But in all circumstances, we are both looking for a fair outcome both ways. We assume that it will be no different to what happened in the earlier lockdowns of 2021. So to be honest, there's no real update -- update on anything at this stage. But we are very -- working very closely with landlords on sorting that out as we move forward.

Great. And when you say that it's currently parked, given the fact that the stores are closed. Are you paying 100% of the rent at the moment? How do we think about the cash outflow for rent given the stores are closed and consumers are unable to shop.

No, the landlords have simply asked us to just cease paying rent on those affected stores, and we're working through a program to come up with some sort of amicable outcome in the coming weeks, actually.

That's good. The $15 million impact to July and August, that's implying some type of step-up in discounting. Can you maybe quantify or talk a bit more about how discounting depth and breadth compared to last year? And I guess when we're thinking about FY '22 or at least in the first half of '22, given the discounting going on, is it fair to say that gross margins are likely to be below PCP?

Yes. Good question, Sam. To give you a sense sort of for the last 3 or 4 weeks, with Melbourne and Sydney both closed, we have been driving customers to the online sites. And the best way to do that is to offer deals. This time last year, we were pretty much at full price for that whole period. I'll call out a number. Our retail margins, when we're at full price, tend to run along at about 60% gross margin. And it's fair to say we've been in the low 50% for this period, to give you some sense of the magnitude of the impact on gross margin. It's a little unknown about what happens. So right now, we are planning that lockdowns, fairly comprehensive lockdowns are likely to continue for September and into October in the case of Sydney. And we anticipate that we'll continue to need to drive a higher level of discount in the prior year to make sure we kept our inventory levels in check and that we don't end up with any aging issues as we get towards the end of the year. So I think it is fair to say that margin will be under pressure because of that sound, but it's too early to tell where it's going to land.

Got it, right. And just in terms of PIVOT, just wondering if you could talk a bit more about what's happening in that business. It feels that while Accent is still committed to PIVOT, it's probably being put to the bottom of -- put to the bottom of the path below some of the other growth businesses. I appreciate that PIVOT maybe has much opportunity for Vertical products compared to the Stylerunner, but maybe if you can just talk a bit more about what you're seeing from PIVOT, what you've learned from it? Any other issues the team is trying to work on?

Yes, Sam, essentially, PIVOT has been closed virtually since we opened it. I mean it's been in and out of some sort of a lockdown the whole way through it's essential 12-month existence. But what we are seeing is that the average stores, in particular, have been quite strong for us, and we're able to achieve very favorable commercial terms to run those stores. And indeed, our growth plan will be definitely more in the outer stores. In terms of priorities, well, like everything else, we've always maintained that we're throwing out a heap of bullets, whichever one lands on the target would be the ones that will push as priorities. PIVOT is still one of those bullets, but obviously, the growth of Stylerunner and Glue have sort of taken priority at this stage. We still will -- we are still opening PIVOT stores. And as maintained, we will get to a certain level of growth and determine what we do next moving forward. But once again, I want to reiterate where we've opened up in what we're calling country type areas, the stores have been quite strong.

So when you say out of stores, you're referring to country areas?

Yes. Yes, exactly. Or what we're calling probably C-grade centers where there's essentially no operators selling sportswear and so on.

Our next question is from Sam Haddad from Bell Potter Securities.

Just a question on the supply chain, if you're hearing some noise in the news about disruption. Can you give us some color from your perspective on what you're seeing to your channels and what the risks are?

Yes, sure, Sam. I'll take that and then hand to Daniel. The -- so far, we're hearing that there are some delays. We're certainly experiencing delays because of shipping, it's a couple of weeks. It's not particularly profound. Everyone would be aware of the issues with COVID in Southern Vietnam and China. We are hearing that there will be some delays and some small cancellations from some key brand partners. But right now, we're not anticipating any significant impact. Our inventory levels are very healthy at the moment, and the inventory is current, and we've got a strong pipeline coming through. So that's sort of how we're seeing it. It's not massive for us as we're seeing it. I don't know if you want to add to it.

No. Not a whole lot to add to that. We're very close team to our third-party suppliers and indeed, all of our factories making our vertical. And of course, there's 1 or 2 weeks delay, that sort of stuff, but not enough for us to have any concern at this stage.

Given the uncertainty with COVID and what that could have impacts on disruption to supply chain. I know things are okay at this stage, but is having -- back of my on slightly on the heavy side on the inventory about $30 million or so. Is that a blessing in disguise given potential risk nonetheless that may still exist?

Yes. Look, Sam, you never necessarily want to be sitting on more stock that you have. I think your assessment is fair in terms of sitting on the heavy side at the moment. I think it places us well. And in fact, if delays out of China increase as we get towards November and December, we'll be very well positioned. As I said, that inventory that we're sitting on is very current. In fact, the majority of it's arrived in the last 4 to 6 weeks. And in our stores, unfortunately, we haven't been able to show it to a bunch of customers in stores over that period and so.

Sam, the majority of the $30 million you talk about, 2/3 of that is in what we call core. We've chosen not to -- not to discount that product in any channel. So we're happy to hold on to that product given that we're quite optimistic for when lockdowns do end that we should see a pent-up demand. My -- the overall planning team have done a spectacular job in managing with the risk between managing our, what we call [ crimstock ], which is what we call very aged stock, and that's the [ cleanest ] that's been basically forever.

And just on that $15 million guidance or at least $15 million in terms of the impact, that's for July and August to the end of August only. Is that correct?

That's correct, Sam. That's our estimate to the end of August. So it doesn't pick up what might happen in September, October, et cetera.

Okay. Yes. Okay. And just final question from me. Just some color as to what you've achieved so far with Glue Store. You said that you're clearly pretty pleased with the progress in the first 90 days. What's been achieved?

Sam, well, first and foremost, we're delighted with the acquisition. But -- so the good news is that we've got a fantastic team in that business, led by a very strong CEO with Darren Todd. What has been achieved is that we have now developed a new concept which will open in Chadstone. Well hope will open in Chadstone in the next 4 weeks. We've signed a further 3 stores to all open by December. We will refit our Melbourne Central store, and we will refit our Highpoint store, which are key stores for the business. There's been further strength in back-end functions. We have a team that will soon lead our overall computer system over to Apparel 21. And indeed, working on claims in our inventory and further harmonizing terms with all of our main suppliers. So there's been a lot going on in the short time we've had the business. Online sales for Glue have just been fantastic. So that gives us a great platform for sort of lead from as we move forward with this business. The other pleasing new sand within the Glue business is that it houses 4 or 5 vertical brains. One in women being Nude Lucy, it's super strong and the forward pipeline of product looks very, very promising.

And sorry, just one final question for me. With the 65 stores that you flagged and with negotiations with landlords still ongoing, does that -- is that tied to successful negotiations? Or can you still open those stores, if there's still delays in those negotiations, been agreed to?

Well, I mean, yes, they are tied to ensuring we achieve the right terms, commercial terms, but we've got landlords who really want particularly Stylerunner and Glue across the country. So we feel very confident that we will succeed with that program. If we're open, we'd probably be going faster again. But right now, we're not. So we're kind of preparing and being optimistic about '22.

Sam, to add to that, I don't think the negotiation on abatements will hold up to 65 stores, if that's what you're asking. [ We still that we need ]. And as Daniel said earlier, we're confident we'll get our outcome on abatements. It's just going to take a bit of time.

We currently have 8 guests waiting in the question queue. Our next question is from Keegan Booysen from Jarden.

First one for me. Just on the inventory position, it looks like you guys are planning for a strong growth in the second quarter in the Christmas trading period. Do you feel still feel pretty comfortable that the level of inventory is just given the last couple of weeks of lockdown and the uncertainty around demand?

Yes, that's a good question, Keegan. And I think the answer is there's a lot of uncertainty. We're not worried about our inventory levels at the moment, and we're very, very well positioned. We are hopeful that as we get into November and December, stores will be able to reopen. And we think if it's anything like previous where stores have reopened, demand will be strong. So as we sort of talked about earlier, we're sitting heavier than we might otherwise have planned to be because of the sales shortfall of experience with stores closed across July and August, but we're also taking measures to make sure that, that inventory level is managed through this period according to the circumstances that we're facing. Hope that helps.

Yes, sure. And then that $15 million cost you spoke to on July and August. Is that the sort of run rate we should expect if lockdowns continue the way they have been?

I think that's a fair assumption as well. And I think that is with Victoria and New South Wales closed more than 50% of our stores, yes, reasonable to expect that, that run rate continues. If Melbourne opens up as we get into October and September, my apologies, then it won't be quite as bad.

Second one, how are you guys thinking around investments in the current brands and in store growth is adding more brands to the portfolio? I mean, are you looking to continue looking at some brands with more than apparel student?

I think the Glue acquisition provided us with a really strong portfolio of owned Vertical brands, along with Stylerunner and Exie. And right now, we feel as though we've actually got a very, very strong portfolio of brands in that space. And with Glue, a really good channel to customers, direct channels to customers. So I think right now, we're going to focus for at least the next 12 months on what we've got and capitalizing on those moves that we've made, and Stylerunner in particular, in the -- the active wear space is just going really strongly for us. Daniel, I don't know if you want to add any color to that?

No. But also in terms of third parties, Keegan, we have -- there's many people approaching this at the moment. Unless it makes sense and it can be, first and foremost, vertically sold or semi-vertically sold through all of our banners, we tend to not entertain any of those discussions. One I can point you to is the new HOKA brand signing. The first sale price has been particularly strong. So when those sort of opportunities come around, we will certainly entertain those discussions.

And just last one for me as well. Just wondering how you're thinking about New Zealand a little more, particularly around which of the brands in your portfolio having this potential over there? And what we can expect from a store growth perspective, particularly around the split between Australia and New Zealand growth plans?

Well, New Zealand, in general, has been super strong for us. We probably don't call it out enough. It's a very solid business for Accent. We currently at 77 stores where, we would be at 100 stores if not by December 1, shortly after early '22. We will open our first Stylerunner store in November in New Zealand. We feel there's a lot of runway for that brand in New Zealand. We'll have an operating website there shortly. And indeed Glue has a lot of potential growth in New Zealand. How many stores at this stage, we don't know. But I would be unhappy if we couldn't at least do 20 of each of those 2 banners alone in that country. On top of that, we have not opened a Trybe store in New Zealand yet. We're currently in negotiations, but we feel Trybe has got some runway in New Zealand for sure.

Our next question is from Ray Tolson, who is a retail shareholder.

Thanks for -- retail shareholder have a quick bit of tone. Just 1 issue. A little rapid expansion in diversification and quite apart from during COVID. There sure got to be a risk that start to spin out of control given the number of moving parts requiring attention. And how are you coping with all of this?

That's a great question. I'll take that first and then hand to Daniel for a bit more color. We -- we did an executive team restructure here early in the year in February, March. And we aligned our executive team here around business lines. Previously, we were working across functional lines. So we've now got a stand-alone team responsible for each of the banners, who's able to drive that business as if it's their own. And then we've got shared services. So that has absolutely helped make sure we kept razor-sharp focus on each of these different businesses we're driving, right? I hope that helps explain how we're managing that at the moment.

[indiscernible] strengthened that in our humble view, we've got the best retail team around us, and have got a very capable can-do GM team that drive each banner, as Matt mentioned, day in, day out. And that's been a very strong move towards how we're actually growing the business in these different areas.

Okay. Justin you might be working 24-hour days.

23, right?

Okay.

We have our next question from Aryan Norozi from Barrenjoey.

So at H1 about the inventory piece. But just in terms of committed orders for the next few months, is the current inventory that [indiscernible] be at? Or are there more orders or inventory to land over the next few months into Christmas?

Yes. That's a good question, Aryan. So there are more orders coming through. There's a continuous pipeline coming through. Our inventory levels would usually peak around October going into November. And that's how we would usually plan it. And you can anticipate that they will peak in October. And Sam Haddad had previously called out a $30 million sort of inventory overage to what we would have originally planned, and that's sort of where we're expecting it to peak, $30 million more than we otherwise would have liked. However, we're not saying that, that's going to cause any issues and we're just being balanced about how we move through that inventory pushing a bit of additional promotion through our website.

Sorry, the $30 million wasn't -- so is that $30 million at the moment you've got over than what you would like to? And then you're expecting that $30 million to continue into October in your peak level, is that right?

Correct. That's correct