Should you buy, hold or sell shares in Accent Group?

Accent Group (ASX:AX1) primarily sells shoes.

They are backed by one of Australia's most successful retailers, Brett Blundy who is also on the board.

Now a billionaire, his previous investments include Bras N' Things which he sold for $500 million in 2018 as well as Adairs (ASX:ADH).

He currently has a 40% holding in the very successful Lovisa (ASX:LOV) and a 10% holding in struggling City Chic (ASX:CCX). He owns 15% of the shares in Accent, down from 19.5%, having sold 25 million shares in September last year for $50 million.

So, what does Blundy see in Accent?

Accent is both a distributor and a retailer, mainly of shoes, but also some apparel brands. They have 888 sales outlets, including 853 physical stores and 35 online sites. The store network includes both multi-brand retail formats and focused stores.

The retail store network includes both franchised stores and corporate-owned stores although they are slowly moving towards a fully corporate-owned structure.

The main brand that is franchised is The Athlete's Foot with 62 of 155 stores being franchises, but this has reduced from 134 stores six years ago as they have bought back the franchises.

Their top three store networks are Platypus with 210 stores, Skechers with 187 and then The Athlete's Foot.

The store network is growing rapidly with 72 new openings in the first half of the year and only five closures.

This included 22 for Platypus and 18 across NudeLucy and StyleRunner. They have a particular focus on growing the later two brands. NudeLucy is a women's apparel brand and Stylerunner is about 60% footwear with the balance being apparel.

The store network has grown strongly over the past five years and they anticipated opening at least 20 more stores in the second half of FY24. In addition to the retail stores they have a wholesale operation whereby they distribute a wide range of global footwear brands to other retailers.

Accent has a high Stockopedia Quality score of 95. This is supported by the Return on Equity of 16.3% along with the Return on Capital Employed of 13.5%. The operating margin of 8.66% is quite reasonable for a retailer and it ranks 15th out of the 44 companies in the segment.

The Bankruptcy Risk, based on the Altman Z-score developed by Professor Edward Altman, warrants a closer look as it is right on the border between Cautious and Safe.

It is hampered by the low level of liquid assets compared to the total assets as well as the total level of liabilities compared to equity. The gearing ratios are high with net gearing at 117%, however when we break this down, we can see that a high portion of the liabilities relate to leases.

If we strip those out and just look at financial borrowings, the net debt to equity ratio is only 20%, a much more comfortable level. The cash balance is $48 million.

Focusing on cash, we can see that the free cash flow per share is high relative to EPS. This means that the profits being reported are translating into actual cash. Indeed the compound annual growth rate of cash over the last five years is 31%.

Accent had a strong year in FY23, but the first half FY24 results underwhelmed.

While strong sales were achieved across some brands, including Skechers and The Athlete's Foot, others found it more challenging, including the largest by store network, Platypus resulting in negative like-for-like retail sales.

Overall revenue declined by 3.1% despite the growth in store numbers. A big contributor was the 25% drop in wholesale revenue.

Gross margins increased from 55.2% to 56.6% but the increase in the cost of doing business (CODB) from 42% to 45%, including increased occupancy and staff costs, meant that at the bottom line, net profit after tax (NPAT) decreased by 28%.

Turning to the most recent data as well as the outlook, like-for-like sales declined by a further 0.7% for the first seven weeks of the calendar year. CODB also continued to increase with rent and wages pressure continuing albeit having eased a bit.

They are still looking to grow their store network with a focus on Nude Lucy and Stylerunner which have been well received.

Another brand which has been demonstrating strong growth is Hoka. Hoka is one of the fastest growing running brands in the world and Accent has the distribution rights for Australia and New Zealand where sales increased 20% over FY23 becoming one of the top sellers.

Owned by the US firm Deckers, they now make up 38% of Deckers' revenue having witnessed rapid growth. They are distinctive for their thick soles.

The price peaked at about $3 three years ago, and is now $2 having hit a low of $1.75 in late May. The share price has been very volatile over the last 10 years.

Overall, they have outperformed the market by a large margin, but it has certainly been a bumpy ride.

Whilst FY24 has been a tougher year, that may be largely attributable to the external environment. If that is the case, and it proves to be only a temporary setback on Accent's growth trajectory, then the current share price may represent a buying opportunity.

The forecast PE ratio is 13.8 and the dividend yield is high at 6.5% fully franked, and that is despite the forecast of declining dividends.

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