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Why Accent Group (ASX:AX1) is my favourite ASX retail share right now

Like many other retailers, Accent Group Ltd (ASX: AX1) has made an impressive recovery since its March lows. Here's why I think it's still got a further growth runway.

Like many other ASX retail shares, the Accent Group Ltd (ASX: AX1) share price has made an impressive recovery since its March lows.

Here are a few ways I analyse this company and why I think it’s still got a further growth runway.

Source: Rask Media AX1 1-year share price chart

Accent Group is the regional leader in the distribution of performance and lifestyle footwear in Australia and New Zealand. It has a well-diversified and popular range of brands including The Athletes Foot, Hype DC, Platypus, Vans, DrMartens and Timberlands just to name a few.

It has over 420 stores across 10 different retail banners and exclusive distribution rights for 10 international brands.

Accent’s COVID recovery

Like most other bricks and mortar retailers, COVID-19 resulted in the shutdown of all of Accent Group’s stores across the country from the middle of March to May when stores were gradually reopened. Sales in March and April declined by $55.7 million or 58% compared to the prior year.

Luckily, good faith arrangements with landlords and $23.9 million of government stimulus allowed the group to substantially slash its cost base and focus its efforts into enhancing its online channels. Closed stores turned into distribution centres and were generating up to $1 million per day from April to June.

At the end of FY20, online sales had increased by 69% and allowed the group to grow overall revenues and EBITDA by 4.5% and 11.8%, respectively.

One important statistic was that in the fourth quarter of FY20, more than 50% of customers who used the online channels were new customers who had not shopped with the group through any other channel previously. This leads me to my first investment case.

1. New, retainable customers

I’ve mentioned this before for some other ASX retailers like Temple & Webster Group Ltd (ASX: TPW), but it’s just as applicable for Accent Group. When a new customer places an order with a retailer for the first time, it’s incredibly valuable.

The customer’s email address is usually provided, which will inevitably result in relentless promotional offers being sent out over time. This is important, but it’s also the increased brand awareness and familiarity which will hopefully retain some of these customers.

I don’t think this is a case of sales being “brought on” on a once-off basis as you’d see in some other ASX retailers like JB Hi-Fi Limited (ASX: JBH) or Harvey Norman Holdings Limited (ASX: HVN). For most people, shoes and clothing get replaced quite often compared to more durable items such as TVs and white goods, so this represents a retainable customer base that will hopefully provide some recurring revenues.

Now that these retailers have customers on board, the company can focus on broadening its product offering to increase its spend per customer, which leads me to my second investment case.

2. Acquisitions that expand the current offering

In November 2019, the group acquired Stylerunner, which is an online destination for multi-branded activewear and sneakers. This appears to be a well-integrated addition to its current offering of brands and will allow it to tap into the activewear market with an estimated total addressable market of $4 billion. The first bricks and mortar store is planned to open next month with up to 5 new stores planned for FY21.

In addition to Stylerunner, the group’s new business is called Pivot, which operates in the value sports and lifestyle market. Its offering is similar to what you would typically see at Rebel Sport. One physical store is currently open with plans for 12 more throughout FY21.

This is another smart move in my opinion because it opens up a whole new market segment which it wasn’t exposed to previously. While some of its other brands could be considered on the more expensive side, this new business hopes to offer well-known brands at discount prices.

Final thoughts

Looking back in time for a moment, Accent Group has a great track record of growing its earnings and delivering value to its shareholders.

It’s achieved compound earnings per share (EPS) growth of 12.3%, and an annualised return to shareholders of 20.4% over the past 10 years.

I like the direction this company is heading in through its growth initiatives. As the company continues to expand both horizontally and vertically, this should drive cost efficiencies and help it to gain market share in new areas.

Accent Group is one ASX share I’d happily buy at current prices as it ticks a lot of the boxes for me.

Retail is obviously at the mercy of discretionary spending levels, but the group’s expansion into a discounted range makes sense and integrates well with the rest of its offering.

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At the time of publishing, the Patrick does not have a financial or commercial interest in any of the companies mentioned
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