Strong LFLs, category promo activity weighing on margins
Accent Group (AX1) provided a trading update for the first 20 weeks of FY25 at their AGM, with Group owned sales +6.8% YTD, (BPe +6.2%) while gross margin was down -70bps (BPe -10bps), largely impacted by the promotional trading environment within their mass/youth focused brands. The new 1H25 new store target of 50 was a beat to BPe while the Frasers Group (FRAS) executive on board another strategic positive for the partnership with the global player in their potential regional expansion in Australia.
Earnings changes
We make marginal changes to our revenue estimates as we factor in a handful of additional new stores for FY25e within the Skechers, Nude Lucy, Style Runner and Hoka brands. We make no changes to our average sales per store (LFL) assumptions and note the relatively more challenging comps through the Nov-Dec period (-2% in Jul-Oct vs +1.8% in Nov-Dec during FY24). However, our FY25e GP margins now see a 30bps decline (vs prev. flat), ahead of the current run-rate (70bps decline) given that we expect a progressive recovery through 2Q. We assume a narrower gap in gross margins vs pcp given a broadly similar promo participation intensity vs 2Q24. Our revised CODB assumptions see a ~30bps improvement in FY25 driving EBIT margins of ~9% for FY25. The net result sees our NPAT forecasts -1.7%/-1.2%/-1.3% for FY25/26/27e.
Investment view: PT down 2% to $2.75, Retain BUY
Our Price Target (PT) decreases ~2% to $2.75/share (prev. $2.80/share) given the modest earnings changes. We continue to view AX1 as a key pick in our retail sector coverage given their scale as Australia’s market leader, growth adjacencies in both footwear/apparel from exclusive partnerships & TAF channel conversion and growing vertical brand strategy led by Nude Lucy. We also view the strategic investment by FRAS in AX1 (~15%) and the board appointment today as a step forward to unlocking the sizable store roll-out opportunity of FRAS’s core Sports Direct banner in Australia.
