Lovisa Holdings Ltd (ASX: LOV) and Accent Group Ltd (ASX: AX1) are some of the highest quality retailers on the ASX at the moment, in my opinion.
But if I had to pick one, I’d go with Accent Group shares. Here’s why.
A quick comparison of Lovisa and Accent Group
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.
In terms of revenue, Accent Group is the leader of the two, with revenues of around $800 million per year.
On the other hand, Lovisa is a retailer of fast fashion jewellery and accessories with 449 stores across 11 countries worldwide. The company has a vertically-integrated business model, through which it designs, develops, sources and distributes products under the Lovisa brand name. It achieves revenues of around $250 million per year.
Why I prefer Accent Group shares right now
I recently wrote articles on both Accent Group and Lovisa which go into these companies in more detail.
I think Accent Group shares fit my own personal investing style a little bit more. There’s no denying that Lovisa has done extremely well for its shareholders in the past. However, due to Lovisa’s global exposure, there’s definitely a speculative element that I would just prefer to avoid as I can still get exposure to Australian retail through Accent Group.
Additionally, in a hypothetical economic decline on a global scale that could see unemployment rising and consumer discretionary spending levels dropping, I view footwear to be slightly more defensive than jewellery. As a result, Accent’s earnings may be more resilient than Lovisa’s, in the short-term at least.
Accent Group’s recent acquisition of a discounted range of footwear brands adds further resilience, as most people will always have a need to buy footwear, but jewellery might not always be as necessary.
Valuation
Based on FY20 earnings, Accent Group’s price tag seems to make a lot more sense with a price-earnings ratio of 16. In comparison, Lovisa shares currently trade at 44x earnings. Clearly, there’s a lot of expectation built into the Lovisa share price, which assumes the business can get back to pre-COVID earnings levels and then add even more on top of that.
When there’s a lot of expectation built into a share price, it can often turn out to be an asymmetrical return, where there’s more downside than upside. What’s more ideal is to find a stock that is fairly priced and still has a lot of upside potential that’s not priced in.
Summary
Both of these companies will most likely do well in the long-term, but unless you’re extremely wealthy, you probably won’t have unlimited capital to invest in the markets. Therefore, you’ll need to make a choice.
To summarise, I think the current valuation of Accent Group shares makes a lot more sense compared to Lovisa and I like how it isn’t as exposed to overseas economic conditions. In addition to this, the company is making some new acquisitions and still has a big runway for growth.
Click here to read more about Accent Group and why I think it’s a long-term winner.
