Accent Group Limited (AX1) Earnings Call Transcript

Thank you, everyone, for joining the Accent Group FY '22 Full Year Results Investor Briefing. We will begin with a presentation by Daniel Agostinelli, Group CEO; and Matthew Durbin, Group CFO and CEO, followed by a Q&A session. [Operator Instructions] Now Daniel, over to you. Thank 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, Matt Durbin. We will now take you through the results for the full year ended 26th of June 2022, an update on our growth plan and a trading update for the first 7 weeks of FY '23. There will be an opportunity to ask questions at the end. If I can now refer you to Page 2 of our investor presentation, which was released to the ASX yesterday evening. The operational disruption experienced in the FY '22 year, along with the associated impacts to the financial results, has been well reported. In the context of the operational challenges and focus that was required to manage the day-to-day business, I'm very pleased with the continued progress executing our growth plan and initiatives. The Accent business has grown significantly over the past 3 years. Through a period of significant disruption, we have continued to invest in growth and to build scale, customer reach and capability across the business. Group sales, including franchisees, are approaching $1.3 billion. We have opened more than 280 stores across Australia and New Zealand to increase total store numbers by more than 50% to 762 stores. Our contactable customer database has grown by 50% from 6 million to more than 9 million customers. Online sales have grown by more than 200% to $263.8 million, which represented 24.4% of our retail sales in FY '22. Our vertical brand and product sales are now more than $70 million from a standing start in 2019. We have continued to grow our distributed brands and have acquired several additional global distributed brands. The Accent business today is scalable and has future growth opportunities through online and new store growth. Our large and diverse brand portfolio and our new businesses continues to grow. The business today is flexible with proven capability to leverage digital and online to quickly respond to trends through our diversified portfolio of brands across footwear, accessories and now more recently, youth and lifestyle apparel. Our market position of the business is also defendable. Our distribution relationships provide access to global product innovation and exclusive access to product. Our vertical owned brands add to product differentiation and support underlying growth margin. Turning to Page 5, sustainability. I'm very pleased to report that last night, we released our first ever bespoke sustainability report. This has been the outcome of an 18-month journey to define our approach across the core pillars of our people, our responsibilities and our environment. Then within this, so to define the initiatives and focuses for the businesses in these areas, some of the early work that we are most proud of is initiation of the Accent Stamp your Feet foundation and our associated partnership with Headspace in Australia and Youthline in New Zealand, who both play an important role in providing mental health and other support to the youth and key demographies that represent Accent's team and customers. Another highlight is our association with the Australian Sporting Goods Association and their shoe recycling program. We have set up 229 recycling collection points across our stores. And in FY '22, we collected more than 56,000 pairs of shoes for recycling. We're just getting started on this journey with a range of ongoing initiatives underway and new initiatives getting started. I will now hand you over to Matthew Durbin to talk about the details of our results. Thank you, Matt.

Thanks, Daniel, and turning to Slide 8. Our total sales for the year, including TAF franchisees, of $1.27 billion were up 11.3% from the prior year. Management estimates that these sales were impacted by around $95 million in half 1 of the year due to a combination of government-mandated lockdowns, which saw more than 400 stores closed for 3 months; and then subsequently, the impact of Omicron in the last weeks of December and into January. Gross margin percentage was also impacted by 190 basis points for the year due to the requirements to move through inventory while stores were closed. Through the year, the company continued to invest in its people, new stores, new businesses and technology, which impacted cost of doing business in a disrupted sales environment. EBIT of $62.3 million is in line with the guidance provided in our trading update on the 22nd of July. Inventory levels at the end of the year were in line with expectations with clean aged stock levels. Turning to digital and online on Page 9. Digital sales continued to grow strongly throughout the year with growth of nearly 26%, and they made up around 24% of total sales for the year. Half 2 saw a significant pullback in promotional activity in store and on our websites with an associated positive impact on average order value as the focus for the online channel shifted away from clearing inventory back to more profitable sales. It was pleasing that online sales continued to grow in total at higher gross margins. We anticipate the digital percentage of sales achieved in half 2 of 19% is representative of a more normal mix of online sales moving forward. Investment continued through the year in loyalty and customer data with the launch of loyalty programs in Hype and Platypus. Coming to VIP and loyalty on Slide 10. Our contactable customer base grew by 900,000 customers to 9.3 million customers. This continues to be the result of a strong drive to invite customers to join in store, along with the impact of our loyalty programs now in place in The Athlete's Foot, Skechers, Hype, Platypus and Merrell. Investment continued in our new customer data platform, which will go live in the first quarter of this year. Moving on to retail and wholesale on Slide 11. During the year, we opened 139 new stores across all formats and closed 15 stores where sustainable renewal terms could not be agreed. New stores continue to perform well, and the momentum in the Glue and Stylerunner businesses, including the new stores in those formats, continues to strengthen. We expect at least 50 stores will open in FY '23, 50 new stores. Wholesale sales continued to grow in FY '22, driven by existing brands and the addition of new wholesale brands, including the brands acquired with the Glue Store business. Sales of vertical owned brands and products grew to more than $70 million and continue to support the improvement in underlying gross margin. Coming to dividends and trading update. The business has announced a final dividend of $0.04 per share fully franked, up 23% on the final dividend last year, bringing total dividends for the year to $0.065 per share. In terms of the trading update, trade for the first 7 weeks of FY '23 has been positive. Total sales of -- over this period are up nearly 49% on the prior year due to positive like-for-like sales, stores opened for trade this year that were closed last year and new stores opened in the last 12 months. Like-for-like sales were up 18.9% in the first 7 weeks. Additionally, total and like-for-like gross margin dollars and gross margin percentage for that period are also ahead of last year and, importantly, are up on the first 7 undisrupted weeks of FY '20. We also wanted to update on some current observations on the supply chain and inflation as they relate to the last 7 weeks. Supply chain constraints have moderated, and delivery performance from our major third-party suppliers has in the main improved significantly. We've continued to action price rises in several of our distributed brands and in our vertical owned products in order to offset input cost price rises. And to this point, we haven't seen any noticeable customer pullback. We remain very focused on cost of doing business to ensure we continue to identify and remove waste and drive cost efficiency. Whilst we have not provided guidance, we want to draw everyone's attention to the previously reported estimate that due to disrupted trading conditions, around $95 million of sales were lost in the first half of FY '22. We also note that gross margin percentage for the full year '22 also due to disruption was around 200 basis points less than the gross margin percentage rates achieved across FY '19 to FY '21. I'll now hand back to Daniel to wrap up.

Thanks, Matt. We acknowledge that there is some uncertainty in both the economic outlook and global supply chain. Having said this, based on the sales in the last 7 weeks, we have not yet seen any consumer pullback and are positive about the start of the year. It is our intent to continue the focus we have had for the last 6 months on full price margins and no lazy retailing. I'm pleased with the progress that has been made through a highly disruptive period on our key growth strategies. We continue to build a defensible business in Australia and New Zealand. Our portfolio of global distributed brands, owned vertical brands, integrated digital capability and a large store network are core assets of our group and position the company well for the growth into the future. That concludes our presentation today, and we would be happy to take any questions. Thank you.

[Operator Instructions] We will begin with the first question from Sam Teeger.

Are you expecting to get all the $95 million of sales and 190 basis points of lost margin back in '23? Or are there some other offsetting factors do you think we should be taking into account?

Sam, I don't want to you make any predictions around that. So I think it's a factual statement that we feel that we lost those 2 last year, and that was simply because of the stores being closed. So I'd sort of encourage everyone to take their own view of that. But if we experience an undisrupted trading period, right now, we're not seeing any reason why a fair bit of that shouldn't be recovered in both accounts.

Okay. Cool. And then in terms of the rollout, you guys are guiding to at least 50 stores. What are the, say, main barriers that you expect to drive this? How many stores have you opened to date in FY '23? And is the slower rollout compared to FY '22 more a function of the deals you're being offered by landlords? Or is it maybe you guys have a bit more of a cautious consumer outlook?

Sam, well, we are certainly driving a harder bargain, I suppose, or deal towards when we're negotiating with our landlords. Some of the things we're also doing outside of opening new stores is expanding some stores where we think there's more growth to be had. An example of that is our Miranda and Garden City. So that's that side of it. In terms of how many stores we've signed to date, I might just refer to Matt. I just can't remember them.

Yes. No, that's all right. It's -- I think Sam's question was how many have we opened in the half to date. And it's a -- in the year to date. And it's a handful, Sam. We're only out weeks in. So let's call it 8 stores have opened since the end of June. In terms of the slowing of the rollout, what we've always said is that it's not our strategy to open less stores or more stores. It's our strategy to do the deals that we need to do with the landlords and the demographies where we feel as though we can get a strong return on investment, and we'll just have to see. We don't want to set high targets for ourselves and then have to do deals to meet a target.

Can I also -- Sam, maybe this is another way to answer it. I'm very confident that we will open at least 50 stores.

Yes. For sure. Okay. And then third question, I appreciate your strategy is to focus on full price sales. But any comments and color around what the competition is doing right now and how rational the market is? It would be helpful.

Absolutely. The competition, while many of our competitors are still discounting, not sure of their stock positions, but we've taken a view that our stock position is very strong. It's clean. It's the cleanest it's been in a very long time, pre-COVID, if you will. So we will continue on that drive. A further reason to that is that as new product is landing in our stores and our supplier base is getting back to some -- well, a lot of normality, our customers are responding. We're seeing sell-through rates on new product that are better than even some pre-COVID periods. So that tells us that there's no need to discount, and we also have a duty to manage our distribution of brands as they should be. And we will continue on that journey.

The next question we'll take is from Chami Ratnapala.

Daniel and Matt, hopefully, you can hear me.

Chami, we can.

Yes. Just a follow-up question from me. I think Sam touched on the store number. I noticed that the breakdown for the stores in terms of banners has not been provided. Are able to talk to this, I mean, which banners would this be -- this number appear to be driven by?

Yes. No problem, Chami. I mean, what you'll notice generally in this presentation is that consistent with the theme of not providing as many targets as we have previously in a whole host of areas, we've pulled back on that data, which I know is a little bit frustrating for you guys. But it's a bit commercially sensitive. The easiest answer for that is if you have a look at our big gun banners and our growth engines in terms of the new businesses, you can assume that to get to at least 50 stores, there will be a bunch of Platypus stores, there will be a bunch of Skechers stores, there will be some TAF stores. And we've previously set out a target for where we wanted to be for Glue stores. And then there'll be a handful across the other banners. So that's probably how to think about it, including some new Stylerunner stores. So I hope that sort of helps. But the big guns of TAF, Platypus and Skechers will -- and then Glue will be the ones where most of the new stores are going to open.

Great. And just on the Stylerunner, thinking on Nude Lucy, would that be continued? Or...

Sorry, say that again. You just broke up there.

So with the Nude Lucy sort of dedicated stores, I think -- I understand that there is one at the moment. Would that be part of the strategy as well?

Yes. There are some Stylerunner stores in that mix, absolutely.

I think you picked up on Nude Lucy as well as definitely Stylerunner. Nude Lucy, we're not talking about yet, Chami. Everyone can go and have a look at the stores if they want to.

Great. And just with 50, are you able to talk to the first half/second half split? Or would this be more a second half story? Or is it broadly across both halves?

Yes. Look, anticipating more first half split of that 50, to be honest. So yes, definitely more first half split, and then we'll see where we're at for the second half.

The next question comes from Keegan Booysen.

Team, can you hear me?

Yes.

First question for me, just around the outlook commentary on the gross margins for FY '23. You said sort of assuming no interruption to trading. Obviously, the GMs are going to be higher than FY '20 or some of the uninterrupted periods in FY '20. Just can you -- outside of the lower promotional environment, if you can talk to some of the other key drivers, what FX is doing, how much vertical brand is contributing to the margin rise, et cetera.

Yes. Perfect. No issue at all. So if you have a look at the table that we typically put in the back of the presentation and also in our financials, we talk about the hedging being at $0.74 going forward. So you can imagine, we're certainly very well hedged for the first half. It's relatively consistent with where we've been. So I'd say currency is fairly neutral. The -- definitely, the pullback in discounting is going to play a big role. And we've now, unfortunately, had to discount more than we'd like for the best part of 2.5 years. And vertical is playing a role. So we've previously talked about vertical product that should be achieving a 10% to 15% improved gross margin on third-party product. And you guys can start to do some numbers as the volume of that grows beyond $70 million, what that might do at a 10% to 15% improvement. We continue the strategy as well of driving our distributed brands, store rollout in Skechers, which continues, more Skechers, Vans and Dr. Martens into our multi-branded banners, margin expansion in The Athlete's Foot through more mix of Hoka, more mix of Saucony, which all come at higher margins.

No. That's great. And then just second one for me as well, can you talk a bit around what the drag has been like for NZ trading and how we should think about the phasing of that, particularly against the comps you're printing now against a weaker Aussie pcp, please?

Yes. Sure. So New Zealand is tough and even to last week remains tough. It's been tough for the first 7 weeks, negative comps. And at the -- to this point, we haven't really seen an improvement in the trajectory. Frankly, we don't think we're doing anything wrong over there. Our execution there is as good as it is in Australia or better. We've got great inventory levels over there. So we're seeing it simply as a function of the fact that the consumer over there and the team still have to romp around in masks, and I just don't think that economy has recovered.

No. That's great. And then just last one for me as well. As you approach around 10 million loyalty customers, I mean, your loyalty database is becoming one of the biggest in the country out of the retailers. When do you plan on making the investment to -- on the back end to get the systems talking to each other? And then maybe if you can talk to some of the benefits you expect to generate from getting the loyalty programs integrated and whether that's targeted promotions or lower CAC costs, et cetera.

Yes. So that's a really good question. We've been investing in that. That project has been underway for the last 12 months. It's just come out of tests, and we've started to get some initial data from it. It's our customer data project. Some of the initial benefits that we're going to get from that are a real sense of the behavior of the customers across the different banners, the crossover shop between a Hype or a Platypus or an Athlete's Foot or a Trybe. And that allows us to start to develop profiles of customers and actually take them on a life journey through our different banners because we get them at different ages. So that's one benefit. And as we get better at understanding those customers, we will be able to target them better with CRM. And that will allow us to create customer segments, more efficient customer segments. And ultimately, what that means is that you're less reliant on paid channels of marketing. That's going to take some time, but one of our big themes in cost of doing business efficiency over the next 12 months is to reduce our paid digital marketing spend, the spend that goes to Insta, that goes to Facebook, that goes to Google, and try and convert more through our own channels.

Next up, we've got Alexander Mees.

Just a couple on cost to start with, please. I'm just wondering, should we be expecting around about 5% increase in your staff costs in FY '23 plus the annualization of the new stores?

Yes. Correct, Alexander. Thank you. The -- we're sort of governed in the store teams by the General Retail Industry Award. And indeed, that went up 5.2%. Support office employment costs won't go up that much, but they're certainly going up. So that's a reasonable assumption.

Excellent. And then just on leases, just wondering what proportion of the leases have rent increases that are linked to CPI, please?

Yes. So we haven't previously talked about that. The rough number is under 25%, so under 1/4 of our leases.

Great. And then just finally, apologies if this is obvious, it's been a long week. Just on your EBIT, should I be thinking about an underlying EBIT number of $70 million, adding back the $7.7 million one-offs? And if so, is that the best comp against the $124.9 million that you referred to for last year on Slide 8 or the $117.1 million on Slide 15?

Right. That's a good question. The $70 million is the number. So that is correct in terms of the underlying. And I'm just going back to look at the slides here. So I can see the $117 million on 15. And so what was the other slide number, Slide 8?

Slide 8, yes.

That is a good question. That is a good question. I think it's the $125 million.

Okay. I think that's consistent with what was reported last year, so that would make sense.

Yes. I think that's right. I think we made -- my apologies, we may have an error in that other slide. We will check that.

Next up, we've got a question from John Hynd.

Could we start on the consumer and perhaps some color around what's happened since April, since the last trading update? And keeping in mind, obviously, the comments you gave around New Zealand, has WA come back? And how much is that contributing to the 20% like-for-like you're doing at the moment?

Thanks, John. It seems to be across the board that we've had positive comp growth, and it's largely about the same. Obviously, we've got much more store penetration in Victoria and Sydney and growing in Brisbane, but it seems to be across the board. But as I mentioned earlier, what we are seeing as we're putting new product into the stores, we're seeing sell-through rates across every state that are as good as I've seen them and certainly as good as pre-COVID. So I'm not sure if that gives you any better color, but we're seeing it across the board. Digital sales seem to have slowed a little bit compared to obviously where they were, and I just think that's just the making of people wanting to get out and simply be out there doing what they did pre-COVID.

Okay. And on inventory, it looks like on a store, if I take your '22 numbers, it looks like roughly, you're returning to normal inventory levels on a store basis. Can you perhaps help us understand where this gets to over '23, keeping in mind, obviously, volatile trading conditions? But you're also -- Stylerunner is becoming a greater part of the portfolio. You've got bigger stores that you're rolling out now. So how does that look? How should we think about that? And also, in regards to '22, can you give us an understanding of perhaps what the units look like versus FY '19 and FY '20 as well, please?

Yes. Look, we have had obviously a major focus on inventory, particularly as we cycle through disruptions. And largely, we've cleaned or cleared any aged stock lines across the total business. In the main, our stores are, in terms of units and dollars from an inventory point of view, are down, are back down to where we would like them to be. There would be a different view from our team, I'm sure. They always want more stock, but we feel that the current numbers are back to where they were pre-COVID. And that's allowing us to produce better margins because the error rate in our buying is simply better. There's a major focus on this area, and we're getting back to, as you mentioned, some normality with our supplier base also fast getting themselves organized to pre-COVID levels.

Okay. So in terms of higher stores or bigger footprints, you're not expecting that to move the dial. It sort of almost implies you're going to be a little bit more conservative with your inventory position for '23.

Yes. Absolutely. Well, look, the inventory discussion for us as a team is a daily or weekly, if you will, review. If you look at our -- if you take our Glue Stores, which are larger footprint stores, stock turns in there are about where we want to see them and improving. So there's a complete focus on, as I mentioned earlier, on keeping our stock levels, in terms of stock turns, in line with what we're projecting. And we're largely hitting those at the moment.

Okay. One more from me, if it's okay. Of the sort of $240-odd million inventory, how much -- I understand that the wholesale stores are in -- within that number. Can you give us some commentary on how you're seeing the wholesale stores, I guess, think about the current cycle? Does this -- I mean, are these numbers ahead of what you're expecting, below? What's the color you're getting there?

Do you mean the growth in the store base or the products within those stores?

I guess how they're thinking about trading, Daniel.

Okay. Well, if you take the Skechers -- our Skechers banners and if you take a look at Skechers' announcements internationally, that brand is growing consistently. And it's not small growth. It's solid growth. New products that we're getting into market are very exciting, and we will certainly be growing the Skechers store base, in many cases, larger footprint Skechers stores around the country. Our brands -- I mean, there's always a brand that's doing better than another one in terms of trend. Right now, we're very fortunate that Skechers and Dr. Martens are super strong. And indeed, we have the Hoka license, which is seeing some very solid trade for us. If you take the Vans business, worldwide, they're off a couple of points, and they seem to have that arm wrestle between Vans and Converse. We've been through 4 or 5 of these cycles, and the brand is just too strong. We're already seeing some recovery from them. So we're very optimistic about what that brand will do for us. Most importantly, we certainly will grow the, call it, the direct-to-consumer through our vertical banners or semi-vertical banners being Vans, Dr. Martens, Skechers and so on. But as these brands do what they do around the world, we're enjoying the sales increases from those brands and trend into our particularly Hype, Platypus and Athlete's Foot banners.

Okay. And just, sorry, one more. In terms of stock in transit of that $241 million, what does that represent?

John, I'm just going to have to look that up. I don't have that number.

Yes. That's all right. I mean, if you want to give it back to me later, that's fine as well, Matthew.

Yes. I can get back to you on that later. It was about like-for-like with the last year.