Accent Group Limited (AX1) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is David Gordon. And on behalf of the Board, it is my pleasure as Chairman to welcome you to the 2020 Annual General Meeting of Accent Group Limited. I'm advised that a quorum is present, and I now declare the meeting open. Today's meeting is our first virtual AGM and is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit their votes. Questions can be submitted at any time. To ask a question, press on the speech bubble icon, and this will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you're finished typing, please hit the arrow symbol to send. Please note that while you can submit questions from now on, I will only allow them at the time when the relevant item of business is discussed. Please also note that your questions may be moderated, or if we receive multiple questions on the same topic, amalgamated together. Voting today will be conducted by way of a poll on all items of business. In order to provide you with enough time to vote, I will shortly open the voting for the resolutions in items 2 to 5. The resolution in item 6 is a conditional item, which will only be put to the meeting if at least 25% of the votes validly cast on the resolution proposed in item 2 are cast against that resolution. If the resolution in item 6 is required to be put to the meeting, I will separately open the poll on that item and give you sufficient time to vote. When I open the poll on the resolutions in items 2 to 5, if you are eligible to vote at this meeting, a new polling icon will appear. Selecting this icon will bring up the resolutions being voted on and present you with voting options. You may need to scroll down on the right side of your screen to see all the resolutions. To cast your vote, simply select one of the options. There's no need to hit a submit or enter button as the vote is automatically recorded. And you have the ability to change your vote up until the time I declare voting closed. I now declare voting open on the resolutions in items 2 to 5. The polling icon will soon appear, so please submit your votes at any time. I'll give you plenty of time and a warning at the end of these items of business before I move to close voting. Joining me today on this virtual meeting is Daniel Agostinelli, our Chief Executive Officer; and our nonexecutive directors, Donna Player, Joshua Lowcock, Michael Hapgood and Stephen Goddard. We are also joined by our group CFO and joint Company Secretary, Matthew Durbin; and our General Counsel and joint Company Secretary, Celesti Harmse; as well as the company's auditor, Deloitte, represented by partner, David White. At today's meeting, we will be considering a number of matters set out in the notice dated 20 October 2020. Before we address the resolutions set out in that notice, I'll make some introductory remarks and provide an overview of our FY '20 results and how we are continuing to create value for our shareholders before passing over to our CEO, Daniel Agostinelli, to give his address. I think it is fair to say that this has been a year like no other. On behalf of the Board, I would like to acknowledge the challenges and hardship faced by the broader community, and to thank our customers, suppliers, team members and shareholders for their support throughout this difficult time. Notwithstanding the significant headwinds we faced as a result of the COVID-19 pandemic, the result of the group has delivered a testament to the strength, resilience and talent of the Accent Group team and culture. With the onset of the COVID-19 pandemic in March this year, in order to safeguard the health and safety of our team and customers, all of the group's stores were closed from 25 March for then unknown duration, and this resulted in a sales decline of 58% in March and April. It also resulted in an acceleration of digital sales, leveraging the group's best-in-class omnichannel capability to offset the impact of store closures and reduced customer foot traffic and shopping centers. The management team also implemented a range of cost out measures and inventory initiatives to rightsize the company's costs and inventory. Given the collapse in sales, the company qualified for government wage subsidies in Australia and in New Zealand. Subsidy payments were passed directly through to team members who were not working or did not work sufficient hours to be paid more than the subsidy. The balance of these subsidies was deployed to accelerate the full employment of team members and to reopen the Accent business through May, including standing up all permanent team members from 1 June to full hours and full pay. Across the group, we also achieved agreement for rent relief with more than 80% of our landlords following good faith negotiations and in the spirit of the government code of conduct. And I'm pleased to say that the company's relationships with landlords are as strong as ever. The group finished the FY '20 year with a strong cash position of $54.9 million and total available liquidity of $152 million. In making the decision to pay both the final dividend and management bonuses, the Board considered the impact of the wage subsidies on the profit and cash position of the company, and determined that the net subsidy payments received were not required or used for the payment of management incentives or for the final dividend. The company has not applied for wage subsidies beyond the end of September. And notwithstanding the hard lockdowns in Melbourne and Auckland between July and the end of October, which resulted in more than 20% of Accent stores being closed, all permanent team members continue to be stood up on full pay throughout this period, including the month of October, post the completion of the JobKeeper payments at the end of September. We will do the same in the recently announced Adelaide lockdown. The Accent Group Board recognizes the dedication, resilience and performance of the entire Accent team over the year. The demonstrated leadership capability to adapt quickly to the challenging new environment has been key to the results achieved during a confronting final quarter. Our business objectives have been achieved with the safety of our team and our customers front of mind and with a strong focus on safety protocols since reopening in May. Turning now to the results. And it is my pleasure to report that the company, once again, delivered a record profit in FY '20, with EBITDA increasing by 11.8% to reach $121.7 million, while at the same time, improving the inventory and net debt position of the group. The record result was an outcome of both the strong digital growth of 69% and the contribution from 57 new stores that opened during the year. The Vertical brand and product program that the team is delivering ensure that gross margins remain strong despite currency headwinds and significant discounting in the final quarter of the year. The cost of doing business was another highlight with effective cost management, in particular, through the fourth the quarter, supporting the profit result. These results continue to translate into value creation for our shareholders, delivering a full year dividend of $0.0925 per share, up 12.1% on the prior year. On a longer-term view, the company's total shareholder return has significantly outperformed the ASX 300 over the last 10 years, as demonstrated in the chart on the screen. We are very proud of all of these results. I will now hand over to Daniel, our Chief Executive Officer, to address the meeting.

Thank you, David, and good morning, everyone. Given the challenging environment in the second half of this year, I'm delighted that we were able to deliver another record year. I couldn't be more proud of the outstanding efforts of our team who had to adapt quickly to a fast-changing environment. Key to our result was the integrated digital capability and the company -- that the company has built over the last 3 to 4 years, which enabled us to connect with our customers and shift our channel mix from stores to digital when all stores were closed during various periods of the lockdowns. The pace of innovation and new initiatives accelerated through the COVID-impacted period. Looking ahead, during the presentation, I will outline our key focus on what we are calling the 3 Vs: VIP, Virtual and Vertical. You can see on the chart on the slide, the acceleration of our business over the last 18 months and that we have big goals in all these areas, some of which have been delivered already and will continue into the future. This year, we have seen a clear shift in consumer behavior to shopping online, and it has delivered strong results across all digital KPIs of the business. Digital sales for FY '20 were up 69% on the prior year overall and a massive 143% up on the period from July to October 2020. Pleasingly, our conversion rates have also increased by 36% on last year, driven by improved marketing and website capability. The group is targeting digital sales to be at least 30% of total sales, leveraging our existing, best-in-class digital capability, more than 6.8 million contactable customers and continued investment in virtual sales channels, CRM tools, express delivery capability and loyalty programs. In relation to our VIP and loyalty programs, with a strong focus on continued acquisition and growth, we currently have nearly 7 million customers on the group database, and we are targeting 10 million customers in the medium term. The group already has a deep experience in VIP and loyalty programs for some of our brands, such as the Athlete's Foot, MyFit Rewards program, which continues to deliver strong retention rates and customer loyalty. We see a huge opportunity for remaining brands in the Accent Group to follow suit in this space, as new loyalty programs are introduced, with the Skechers program due in early 2021 and all other banners in the 12 to 18 months after that. And we are taking a strategic approach to constructing our loyalty programs to ensure that the programs deliver incremental outcomes for the business and value to our customers. Having a robust customer database gives us the ability to tactically drive sales outcomes at short notice when required with virtually no marketing expense. We are prioritizing our focus on customer data and insights to ensure we are customer-centric in everything we do. Virtual selling is the next incredibly exciting initiative that I'm delighted to share with you. We are among the first retailers in Australia and the first in our market segment to launch a virtual sales division, which has been an incredible achievement. When we saw the shift to digital, we knew we had to put more energy into supporting the sales process for digital customers, and so during COVID, we launched virtual sales. This means that a customer who is online can be served by one of our team members in store, and they have an experience as good as you can get in any one of our stores. The customer can live chat with the store team member through an app called HERO. They can share photos and they can do video calls, the Athlete's Foot team offering the same filing service through the website that they do in store, which is incredible. And we have seen some fantastic results from this channel. Our conversion rate for customers who use this service is over 30%, which is a very strong digital conversion benchmark. Our customers love it and so do the media. We have had this service featured in the Financial Review, A Current Affair and also Ragtrader recently. The introduction of the HERO app demonstrates the group's ability to innovate ahead of our competitors and ahead of the curve and to be at the forefront of the changing dynamics in digital retail. And to demonstrate to you just how great the HERO app is, I will now play you a short video. [Presentation]

The last V in our 3 Vs is vertical. Our vertical program continues to gain momentum, generating $13.5 million of sales in FY '20, which is more than double the $4.5 million in the prior year. This program delivers strong gross profit margin and will continue to be expanded into all banners in FY '21, including the launch of a brand-new vertical brand called ITNO in our Platypus and Stylerunner business. Stylerunner, in particularly, provides us with an amazing platform to drive a higher level of vertical sales across a number of categories. We are targeting a sales mix of vertical products and brands to be at least 10% of our sales mix, and the growth in this segment should continue to drive strong growth margins as we move forward. At the same time, we are focusing on leveraging the shift to digital and our 3 Vs. We are not slowing down the growth in the store network at the same time. Accent Group remains committed to a long-term strategy of delivering customers a best-in-class integrated digital and in-store experience, and we will continue to open and renew store leases where our targeted return on investment can be achieved. We are indeed ahead of plan for new store openings, and now expect to open approximately 80 new stores in this financial year, including some new concepts. The first of those new concepts is PIVOT, and I am pleased to report that we opened the first PIVOT store in Shellharbour in June and the second at Highpoint in October, and both stores are trading well ahead of expectations. The website also went live last month, and we've received strong support from our brand partners for PIVOT, which operates in the value sports space, lifestyle and the work market. We see the potential for up to 100 stores over time with 15 stores signed to open by 2021. Pivoting somewhat from our core business of footwear, more than 40% of the sales mix in PIVOT is coming from apparel, equipment and accessories, with a key focus on development of vertical brands and products to achieve margin growth. And the other relatively new business that I'm delighted to report on is Stylerunner, which has performed very well since we acquired the business a year ago, delivering 60% sales growth and 153% gross margin growth in Q1. We launched a new website in October with added functionality and improved user experience. But most exciting of all has been the opening of the hotly anticipated first Stylerunner store in Armadale in Victoria on the 31st of October. The design of this store sets a new benchmark for activewear retail in Australia, taking its inspiration from nature, complete with a lake-like oasis crafted from a sycamore timber, marble and a champagne steel, greeting guests on arrival, and a neon cloud floating above the rear lounge. We have signed a further 3 stores. And in our view, Stylerunner has a very significant runway in both digital and store sales and the ability to be a stand-alone vertical concept over time. Thank you. I will now hand you back to our Chairman, David Gordon, to give you a trading update before conducting the formal business of the meeting.

Thanks, Daniel. Turning now to an update on trade. Sales to date are ahead of expectations, driven by continued digital growth, strong store reopening in Victoria and ongoing strong trade in other states and New Zealand. Like-for-like sales for the first 20 weeks were up by 1.3% overall on last year and up 15.7%, excluding Victoria and Auckland lockdowns. Digital sales also grew by 129% over this period compared to the prior year. These strong trading results have been achieved despite the lockdown and forced store closures in Melbourne and Auckland between July and October, which impacted sales by $39 million compared to the prior year. Our plans are well set to capitalize on the important November cyber events, on Christmas and back-to-school trading periods. Our integrated omnichannel model has allowed us to trade strongly through a highly disrupted period, along with demonstrated operating capability to respond to store impacts that may arise during -- or due to COVID-19, including the current Adelaide lockdown. Ladies and gentlemen, that concludes the business update, and we will now progress to the formal business of the meeting. As I mentioned at the start of the meeting, voting is being conducted today by way of a poll. And voting is currently open for the resolutions in items 2 to 5. At the end of the discussion on these items of business, I will give you a warning before I close the voting. The first item of business is to receive and consider the 2020 annual report. There is no formal resolution required for this item, but I invite any questions you may have about the financial statements or about any aspects of the company or the business generally.

This is a time for any general questions as I will restrict questions about the specific resolutions to matters pertaining to those resolutions. So Celesti Harmse, our General Counsel and Joint Company Secretary, will be the moderator of the questions for today's meeting and has been receiving your questions submitted through the online platform. Celesti, are there any questions from shareholders about the financial statements or the business generally.

Yes, David, we have a number of general questions for today's meeting. The first one is from Mr. Raymond Hempel, who has asked you to provide some details on any planned M&A activity.

Great. Thank you, Mr. Hempel, for sending in your question, and it's always a very interesting one in the sense that we are constantly on the lookout for new businesses, new business ideas and to look at other ways in which we can grow the business. As you're aware and as Daniel's just mentioned, it was only a year ago that we acquired the Stylerunner business, which is already proving to be a mini powerhouse in our business. And we have a constant stream of new business opportunities -- M&A opportunities that we are looking at. But we've always been highly selective in the opportunities that we spend our time on and always been highly focused on shareholder value at any stage when we're considering the valuation of an acquisition or other such transaction. So I suppose we've been quite selective, but we are very happy with the pace at which we're moving. As you can hear from Daniel's report, there are any number of new projects going on within the business at any stage and a constant lookout for new opportunities. So I can assure you that there won't be a lack of activity going on within Accent Group in the year to come. Thank you for your question. Are there any other questions, Celesti?

David, the next question is from Mr. Eric Farrugia, who has asked, how will the company go about paying off its long-term debt?

Thank you, Mr. Farrugia, for your question. And of course, debt is a subject that we are keenly -- that we watch keenly. We're in the fortunate position that we have a very low level of long-term debt. On average, our net debt is something in the order of 0.4x the annual EBITDA of the business, which means that we would have the ability to pay off our debt based on around 3 or 4 months of our trading. Our business is a very cash-positive business. And we are very pleased with the support that we have from our bank at NAV and the ongoing work that gets done by the finance team in monitoring our debt position. So we would probably -- or are considered to be quite conservatively geared amongst our peers, and we kind of like it that way. We have access, as I mentioned in my report, to -- of over $150 million worth of debt, further debt, if there's something we wanted to do. But for the moment, we're quite comfortable with our long-term debt position, particularly given the current environment. And the fact that it is small and low provides us with a lot of comfort. Thank you for your question. Are there any other questions, Celesti?

Yes. Our next question is from Mr. Ray Tollison, who asks, what areas are you expanding into outside of footwear?

Thank you for your question, Mr. Tollison. It's a very good question. And I suppose, given that this is a public platform, I don't necessarily want to telegraph all of our moves to our competitors, but you can see from the information we've already provided that there are a range of areas in which we're moving beyond footwear. Stylerunner and PIVOT are good examples of that, where there are -- there's apparel in the mix. The Athlete's Foot online program is including a broader range of product, including various things outside of footwear. And all of our stores and our online sites are increasingly selling a broader and broader range of accessories, including our vertical accessories. So we tend to focus in the areas that we know well and take steps outside those areas as we see opportunity that's within our core range of competency. And so we will continue to push that envelope. And if we were to do anything specifically outside of our core area, we would certainly notify the market. Thank you very much for your question. Who's next, Celesti?

Our next question is from the Australian Shareholders' Association represented this morning by John Whittington, volunteer company monitor for the ASA, and I'll read you his question. Today, I hold proxies for 63 ASA members and nonmembers for over 1.3 million Accent Group shares, which would make us #15 on your top 20 list. Mr. Chairman, the value of the company is dependent on the company's social license to operate, which is impacted by the issue of modern slavery, and yet, there is hardly any mention of this in the annual report. What is the company doing to make sure it doesn't destroy shareholder value by being tainted with modern slavery issues?

Thank you for your question, Mr. Whittington. And welcome. We enjoy a great relationship with the Australian Shareholders' Association and are highly supportive of your role in acting for small shareholders around the country. The question of modern slavery is, as you know, a very important one and quite a vexing one. The requirements for our publication of our modern slavery policy, the date for that moved from 31 December to 31 March, but we are, in fact, going to be publishing our model slavery policy sometime in early December. And it's a matter that we take into significant concern. As you would know, our industry globally is one where there is a real concern about the issues of modern slavery in relation to the production of footwear, particularly in the Asian countries, and it's one that we take very seriously as well. It's a complex matter. And as you know, the modern slavery requirements are extensive as they should be. And so you will see from the policy that we publish in a matter of days' time, the extensive and comprehensive way in which we propose to deal with modern slavery. You're absolutely right. The value of our company depends, to some measure, on our social license to operate, and that is impacted by issues such as modern slavery as well as a range of other issues, and we take them all very seriously. Thank you for your question.

Thank you, David. We have another question from Mr. Whittington. Mr. Chairman, returning to the issue of social license to operate, on Page 42 of the annual report, you indicated that the company received $23.9 million in COVID wage subsidies from the Australian and New Zealand governments. While acknowledging the excellent work of the Accent Group executives in handling the crisis so well for shareholders, Accent Group has been highlighted in many reports of paying significant bonuses to executives whilst receiving government COVID handouts. What risk analysis was done by the Board in making the decision to pay such large incentives in these times?

Thanks for the next question, Mr. Whittington. And the question of -- the topic of the government subsidies is a very important one. When we took the decision to apply for subsidies at the end of March, we were in the process of closing down all 500 or so of our stores around Australia and New Zealand, with no idea what the future was going to bring. And we were very pleased and grateful, as all other businesses were, with the proposed subsidies that governments were providing. In the months that came after that, we, as you know, were able to trade exceedingly well, and our team responded in a fantastic way. Our senior executives, all the way down to the most junior members of our team, all worked harder than I believe they ever had before, and generated not only sales and returns for our shareholders, but ensured that all of the safety protocols were in place to protect our customers and most importantly, to protect our team. Therefore, when it came to the end of the year, in the consideration of management bonuses, the Board looked very closely and gave due consideration to all of the relevant issues pertaining to the question of the payment of those bonuses. And we were fortunate that we were able to determine that we could not only pay our bonuses, but also pay increased dividends to our shareholders because those 2 are very much linked in our minds. Our team should be sharing in successes when our shareholders also enjoy that success, as they have this year, with record profits. And we were very importantly able to determine that we could pay those management bonuses and those dividends without any of the cash received from any of the wage subsidies from governments in Australia or New Zealand. And so it was that we determined that it was appropriate, indeed, our team had met all of the conditions necessary to achieve their bonuses. And in circumstances where shareholders were going to enjoy record dividends, we felt it appropriate that our team should also be -- we should reflect in the performance that our team put in, particularly in the last quarter of the year, that they should achieve and be paid the bonuses to which they were entitled. It was not a question that the Board took lightly, and there was a lot of discussion about it over a long period of time, but I'm very pleased with the outcome and with the decision that we took. Thank you for your question.

Thank you, David. Just staying on the same topic, we have a comment here from Mr. Peter and Mrs. Andrea Story. The comment is, I congratulate the company on paying full-time staff and casual commitments during the lockdown period. Our staff are our most important asset. This demonstrates a great company culture. And I'll move on...

Let me just address that. So I see. I want to thank Mr. and Mrs. Story for sending in that great comment. And I want to reassure them and everybody that it is always the case, and it's a core part of our culture, that our most important asset at this company is indeed our people, our full and part-time people in the stores, the people who work tirelessly in the support center, from the top of the organization all the way through to the very bottom. It was the concern of those people that caused us to close our stores ahead of most when the pandemic first hit, and I'm proud of not only the actions that we took, but the response by all members of our team throughout a very difficult period. I should also add that we continue to monitor and will monitor in the period even after the pandemic to ensure that all members of our team, from the top all the way through to the bottom, are managing through the issues that the pandemic has raised, and we have in place programs to ensure that there is support for those people at any time. Our people are our most important asset, Mr. and Mrs. Story, you're absolutely right, and we are very proud of the team as it expands. In fact, I believe that there's something now in excess of 6,000 people that make up the Accent team around Australia and New Zealand. And each and every one of them are our most important asset. Thank you for your comment. Who's next, Celesti?

David, our next question is from Quinn King, shareholder. And his question is, as you renegotiate new rents, what discounts have you been receiving?

Thank you for your question, Mr. King. So we have over 500 stores, and they all operate, as you can imagine, on different rents. So I don't have at my fingertips details of every rent reduction. If I did, I'd also be quite cautious about what I would say because those negotiations are all confidential. What I can say is that we have made very substantial progress with our landlord partners in looking for abatement to our rent that was commensurate to the reduction in foot traffic that occurred in our locations. I'm also very pleased to say that those same landlords are the parties that we continue to work with as we expand our network beyond the current 550-odd stores, and they're all highly supportive. We value the relationship with those landlords as a cornerstone of our business. And unfortunately, I can't give you specifics for those reasons. But I can assure you that the management team has worked tirelessly to maximize the interest of our company and our shareholders in these difficult times and achieved spectacular results in doing so. Thanks for your question, Mr. King. Is there anyone else, Celesti?

David, we have 1 final question from Mr. Whittington of the Australian Shareholders' Association. Mr. Chairman, I know you are the Chair of the Nominations Committee, and yet you have managed yet again to keep the composition of the Board largely male. This lack of diversity is at odds with the rest of the company. Can you explain what your process for attracting women to the Board?

Yes. Thanks again for your question, Mr. Whittington. And you're correct, I am Chair of the Nominations Committee. Diversity is a cornerstone of our business, and unlike many, we've been able to achieve diversity in every level of our business, from the people who work in the stores, all the way through the senior executive ranks. In fact, if you look at our senior executive ranks, I'm proud to say that we have a very healthy balance. And yes, it's true that we don't have as many females on the Board as I would like. I should say that Donna makes her presence very well-known and provides wonderful feedback and contribution to the Board from a perspective that some of us may not have, given her background and experience. And I can assure you that we will continue to review the diversity at the Board and at all levels of the business as we move forward. If your reference is to the recent addition of Joshua to the Board, let me say that our policy is trying to find the best person for a particular role, irrespective of their gender, race, color, creed, sexual preference. And in the case of the Board position we were looking to add, the specific skill base that we were looking for was someone who was very well attuned to all of the digital issues that we face as a business. And I have to say I'm absolutely delighted that we were able to secure someone of Joshua's caliber, who not only has years and years of experience in the area, but is considered a leader in the field in America and gets to see things ahead of time that we, therefore, get access to. So your question is well put, and I want to assure you and the rest of our shareholders that we are very much focused on diversity. And we'll continue to do everything we can to ensure that our business -- the people in our business reflect the diverse space of Australia and New Zealand. Thank you for your question, Mr. Whittington. Celesti, are there any other questions?