Accent Group Limited (AX1) Earnings Call Transcript & Summary

Thank you, everyone, for joining the Accent Group Investor Briefing. We will begin with the presentation by Daniel Agostinelli, Group CEO; and Matthew Durbin, Group CFO and COO, followed by a Q&A session. [Operator Instructions] Now Daniel, over to you. Thank you.

Thank you. Good afternoon, everyone, and welcome to our call today. I'm joined on the call by our Group CFO, Matthew Durbin. This morning, we released to the ASX an announcement regarding a significant and exciting strategic transaction with the Frasers Group. If I could refer you to Page 2 of the presentation that we released to the ASX concurrently with the announcement this morning. The key highlights of the transaction include the rights for Accent to launch and operate the Sports Direct business in Australia and New Zealand for an initial term of 25 years. The company has plans to roll out at least 50 Sports Direct stores and online over the next 6 years with an ambition to reach 100-plus stores over time, a strategically important alliance with our largest shareholder that will enable an enhanced product portfolio and product access for our customers. The Frasers Group will increase their shareholding in Accent to more than 19% through a share subscription, which will raise around $60 million to be used to fund the initial rollout of the Sports Direct business. The transaction is expected to complete on the 12th of May. I will now hand you over to Matthew to walk you through the strategic rationale in further details.

Thanks, Daniel. As many of you will know already, Frasers Group is a large international retailer of sports and lifestyle brands and one of the leading sporting goods retailing businesses globally. Frasers also have long-term significant trading relationships with the best global sports brands. Sports Direct is a globally recognized sports business that retails a wide variety of performance sports at leisure and sports fashion brands to their customers. Combined with Accent's leading position in sports and lifestyle footwear in the Australian market, the alliance between the 2 companies creates a powerful brand and capability platform to drive the Sports Direct business in Australia. Sports Direct ANZ will have access to a market-leading portfolio of brands, leveraging the strength of Frasers' owned brands, Accent's distributed brands and relationships with global brand partners. In terms of the ANZ sports market, our best estimate is that the market size is more than $5 billion across footwear, apparel, accessories and equipment. Sports Direct rollout provides a platform for Accent to grow a large and significant business, expanding sales in sports and performance footwear and growing in categories like sports accessories, apparel and equipment in which Accent does not currently participate. Now turning to the details of the transaction. First, the share issuance. Frasers will subscribe for and be issued 35.2 million Accent shares, representing a further 5% of the issued capital in Accent immediately post-completion of the issuance. This will take Frasers total shareholding in Accent to 19.57% of the issued shares. Proceeds from the issuance of $60.4 million will be used to fund the initial rollout of the Sports Direct business in ANZ. The issued price of $1.72 represents 3.5% discount to the ASX closing price on Friday, the 11th of April. In terms of the retail agreement, in relation to this, Accent will have the right to run Sports Direct in Australia and in return certain royalties based on sales will be payable to Frasers. The company has plans to roll out at least 50 Sports Direct stores and online over the next 6 years with an ambition to reach 100-plus stores over time. There is a minimum royalty amount payable to Frasers, which is subject to various sales percentages and may amount to a minimum of $100 million over the 25-year term. The royalty minimum is expected to commence from 31 December 2028. Finally, MySale. As part of the transaction, Accent will acquire the assets of Frasers' discount online fashion marketplace, MySale, which will enhance Accent's clearance channels for Sports Direct and other Accent brands. I'll now hand back to Daniel to wrap up.

Thanks, Matt. In wrapping up, I'm delighted to announce this important strategic transaction with our largest shareholder. The transaction represents a significant growth opportunity for Accent. Sports Direct is one of the leading sports goods retailing businesses globally, and Frasers and Accent see a wonderful opportunity to bring a new and exciting global sports business to Australia and New Zealand. Thank you.

[Operator Instructions] Our first question will come from Garth Francis.

Matt and Daniel, congratulations on the agreement. Just wanted to ask -- just on that store rollout, given the pace, have you -- are there any sites that you've -- or examples of sites that you could give us that you would like to be in with Sports Direct? And then just the -- in the release, it says that getting to 100, is that mandated by 2033? I mean, it says 50 stores by 2031 and then 100 by 2033. So is that 3 -- 2 years to open 50 stores? Am I correct in saying that?

The 100 stores is an aspiration. But yes, there's a part of the agreement that is mandated for us to get to 30 stores and then 50 stores.

It's not mandated to get to 100, Garth, to be clear. So it's an ambition, and that's something that we'd all hope is very possible.

In terms of the stores, Garth, there's many places we want to be. Because we had not concluded the deal, we really haven't gone out to all the landlords. But the ones that have, of course, read some updates in the press about this potential deal, they've now come to us with sites in many areas. When I say many areas, 6 to 8 key sites that we are negotiating. And at this point, I'd not want to get into where those sites are purely from a competitive sensitivity point of view.

Fair enough. And could you give us a sense of what size those sites are on average?

Well, our plan is to follow the DNA exactly of what Frasers Group have done worldwide with Sports Direct. They have stores from 1,500 -- from 1,000 square meters right up to 5,000 square meters. We will -- as the opportunities arise, I assume there'll be a combination of 1,500, 2,000 and 2,500.

Our next question will come from Chami Ratnapala.

Congratulations, Dan and Matt. Nice to see the announcement. A few questions from me, if that's okay. Just in terms of the timing, I mean, 6 years, maybe a bit on the phasing of the timing of the first 50 stores, if you could?

Yes, Chami, I think it's a little early to answer that. I think the easiest way to think about it is that it is 50 stores in the 6 years. We've got to get amongst it. There's certainly a lead time for some of the stores. To Daniel's point, we've got 8 sites we're negotiating on. There's lead times on buying, but we'd certainly hope to have a few on the ground. I'm going to say, this financial year between now and June and then get going after that.

Just to be clear, when we say this financial year, we mean FY '2...

My apologies to -- sorry, sorry. FY '26. Thank you, Daniel. My head is already in next year.

I think it -- but we would hope, Chami, that at least 1 or 2 stores this calendar year would be an aspiration for us.

Yes. Okay. Great. And you did say that it's going to be a mix of that small to flagship stores following the Sports Direct DNA?

Yes, exactly. As mentioned, they operate in some, whatever it is, 25, 30 countries and we've explored a few of those countries. And our job, no different than what we do when we run our brands. We follow the DNA of those brands as closely as we can, and we'll do the same with the store rollout and formats.

Perfect. And then just with the $60 million via the placement, how much is that funding? Is that funding exactly the -- for 6 years requirement? Or just to clarify that.

Yes. Look, it will go a fair way to funding the early rollout, Chami. And at point in time when we've rolled a certain number of stores, the business should be strongly cash flow positive and self-sustaining in terms of investment. One of the questions that I know we'll get asked a lot is -- and to put any concerns to rest is do we think we're going to have to do a further issuance at any point in the next period of time in that first 6 years? And the answer is right now, no further issuance is required based on our modeling.

Perfect. And just as a follow-up there, I mean, in terms of the net CapEx requirement for these stores, is it a bit different here in Australia where you will have a higher landlord contribution than a typical Sports Direct store?

Look, I think it's too early to answer that question, Chami. I think we've got to do the negotiations with the landlords and then work through it. So if I can, we'll leave that until we're sort of getting some more detail around the early stores.

Our next question comes from Kade Madigan.

Congrats on the announcement this morning. Just in terms of the category mix of the stores, what areas were you really looking at competing in? I was assuming stores will predominantly be footwear and apparel, but in the announcement, also mentioned sports equipment and accessories as well. Will that be a meaningful part of the store mix?

Probably not meaningful, but certainly, it does make up part of the model. But primarily, the business is a sports business. It's not really a discounter, it's more of a value business, and it plays across all the big brands of sport that you see worldwide, I guess. But the accessories is certainly a big part of that business, but primarily, it's about footwear and apparel.

Okay. Excellent. And then I guess maybe just building on that one. What do you see for the possibility of sales cannibalization from Accent to other banners? I mean the obvious one is athlete's foot, which sort of plays directly in that space. But do you see any overlap potential with Hype or Platypus for some of the sports-orientated brands in those banners?

Look, I mean, any time a pair of shoes is sold that's not in one of our banners, you could argue is a bite taken out of what we want to do. But currently, we have Athlete's Foot that competes against some large operators. And we're very happy with our positioning there in that business. So from -- as an example, the Athlete's Foot business today does not sell any Nike, virtually nil. This business of Sports Direct will be a big player with Nike. So just to give you a bit of an example of where Sports Direct predominantly plays. But of course, there's always going to be some cannibalization, I would expect, but we think it will be minimal on the current brands -- banners that we run. The other bit that I think is very important to what we're doing here. If you look at worldwide, the players in this area, there are only 4 big major players of the world that are deemed as global. And they're the ones that, I guess, command the sort of products they get and the segmentation. Those banners are Dick's, JD Sports, Foot Locker and the Frasers Group. This is why, from our point of view, it makes very, very logical and smart sense to really get together with one of the big players of the world, particularly in sports, which is an area that we know well and already play in. And we've got the added advantage, which none of the other players have that we are also distributors of brands and key brands at that, Hoka, Saucony, Merrell, Vans and the like, Skechers. There -- all these distributed brands will also have a home within Sports Direct and a significant one at that.

Our next question comes from Ben Jones.

Great job on getting the deal away. Just another one on that minimum store openings target, 30 by 29, 50 by 31. What actually happens if those targets aren't met? And are there any profitability hurdles associated with those opening targets?

So Ben, in terms of the profitability hurdles, no, there are no profitability hurdles. Obviously, we want the stores to be profitable. We expect they will be. We've called out in the release that there are various termination rights throughout the agreement relating to various clauses. The 30 to 50 stores is a very high standard that we are required to hit as part of the contract.

Got you. And then you made the comment in the present that you're expecting quite attractive near-term metrics. Can you just sort of talk us through what those sort of metrics are that you'll be assessing the deal on and how you're quantifying that impact?

Can you be a little more specific for me, Ben?

Yes. I mean you made the comment in the presentation, you said attractive expected near-term metrics. I was just interested in what those metrics are.

Yes, sure. So one of the things that we look at carefully is EBIT return and return on investment. So one of the hurdles that we set in our business is for invested capital return on investment greater than 20%. So you can imagine that, that's a core part of the way that we've modeled this and driven it. And we've previously said that we'd like to have some buffer against that return on investment to account for risk. So that will be a key one. The other thing we've talked about as we start to open stores, we've certainly set some objectives that we'd like to hit in terms of sales per square meter and profitability per square meter. And we've talked about those sorts of things before. The best reference points I can point to you on that are what's publicly available, about what Sports Direct is doing in other parts of the world at the moment.

Yes. Perfect. Very helpful. And then just a final one. I mean is there any guide you can provide on how we should be thinking about that minimum royalty guarantee? I mean a potential minimum of $100 million over the 25-year term, we should be thinking about that as sort of $4.5 million a year. Is that a linear assumption fair? And is there an actual contractual minimum? Like, why is it the case where there may be a minimum? And is there a cap on that as well?

Look, I'm going to limit my comments to what's in the release on that, Ben. It's a very sensitive commercial part of the agreement. And that's all we can provide in terms of the color at the moment.

Our next question comes from Aryan Norouzi.

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So sorry, I don't want to interrupt you, but we are unable to hear you. You seem a bit far away or muffled at the time. Please re-ask your question. Our next question will come from Wei-Weng Chen.

Just wondering, are there synergies here with other Accent banners? Are you able to sell any of your existing -- your private label brands into the -- into SD?

Absolutely, Wei. We can sell anything we want in the banner, assuming it makes sense. But absolutely, the new brand to join our stable pretty soon will be Lacoste and Dickies. I assume both will be sold in that banner. Obviously, Hoka is pivotal in what we're doing. We're very fortunate that a brand we distribute called Saucony or SAUCONY, however you want to call it, where you're from, is critical to what we do. And as I mentioned earlier -- on a question earlier, our Athlete's Foot business currently does not sell any Nike and indeed a very, very minimal amount of -- and I mean very minimal on Adidas. These are 2 strong brands in Sports Direct worldwide. So when you put that together, plus our brands, plus hopefully some other brands that we'll be able to distribute moving forward, it makes it meaningful, particularly when it comes to product segmentation, exclusivities and indeed, hopefully, some sort of a better margin for doing it.

Wei to follow up on that question on the slide pack on Page 7, there's a great representation of the brand portfolio for Sports Direct Australia and New Zealand. And you can see our distributed brands feature very strongly. On the left-hand side, though, the Frasers vertical brands, we get access in their own brands. We get access to all of their own brands, which are proper brands in their own right. So that's very significant.

Okay. And then the standstill agreement and taking ownership to 26%, is that incremental sort of 6%, 7% going to be via subscription agreements? And is that going to serve as funding for future stores beyond that initial bunch?

There's no plans for future subscription agreement, Wei-Weng. And I said earlier, right now, based on our modeling for the first 6 years, we have no requirements to do further issuance. So hopefully, that sort of answers that question as best I can.

Yes. Okay. And are you expecting similar economics to U.K. stores at sort of approximately sort of 15% to 20% EBITDA margins?

Look, we've done our modeling based on the best intelligence of what we can see from what Sports Direct achieved in the U.K. Clearly, there's some differences in the Australian market. We shouldn't lose sight of the fact that we've got distribution here of our distributed brands, and we'll be driving a really good mix of Frasers' vertical as well as Frasers' owned brands. So that certainly helps the margin, noting though that we've also got royalties to be paid out of that margin.

Yes. Okay. And then just the last question on the MySale acquisition. So I guess, how much was this acquired for? What's the inventory position associated with this company and confidence levels in the actual valuation of the inventory? And is the business profitable and cash generating?

So I'm going to highly limit my comments to say that in all material respects, it's not material to what we do today. However, it will be a very good clearance channel for us and allow us to accelerate clearance of products and manage that in Sports Direct. Clearly, you guys will get an acquisition note at the end of the year, and that will bear out that nothing of what we've done there is material, which is why we haven't released any of the numbers.

And we -- the reason why it makes some sense with that is you may or may not be aware that we operate some 57, I think, DFO-type stores, clearance stores around Australia and New Zealand. And of course, we're paying rents in 57 locations and everything that goes with that. The OZSale or MySale that depends on which one the -- there's exactly the same thing. The database is very strong in that clearance area. So we've got some work to do there, but I kind of see it as exciting at the moment.

We'll go back to Aryan Norouzi.

Just first one, just on the access to brands. I mean, typically, brands like Nike, they've got tiering systems with different retailers, Tier 1, Tier 2, Tier 3. And then in some cases, you get exclusives, for example, Rebel, I said at the moment. Like where does Sports Direct sit on the access to brand side? Is it a Tier 1 or Tier 2 supplier? And do you get access to the full range? Or is it much more restricted in terms of the rollout here in Australia with some of the key brands, please?

Well, we will have access to exactly what Sports Direct has access to worldwide, which from everything we've seen is the best of the best in the commercial space. Tier 1 is not product that Sports Direct or Rebel or anyone in this country plays in. Tier 1 is only for the -- I guess, the subtype stores that we also run ourselves. But we're talking about the commercial stuff, we will have the best of the best.

Great. And then in terms of dealing with suppliers, I mean, is it local -- I mean, can you leverage Sports Direct's global terms with those suppliers? Or is it in a case where you look at -- you've got to deal with local head offices in Australia for the Nike or any other brands. And so you don't have that scale advantage that you would have had if there was global terms in terms of sourcing?

No, our plan is to certainly leverage. I mean, certainly leverage what Sports Direct will drive worldwide in every respect, not just product, but all sorts of segmentations, product availabilities, exclusivities, all of it. I mean, Sports Direct are a major shareholder here. And any benefits they get in one country usually translates worldwide from what we've seen. And the support from the local brands has been very well received so far.

Awesome. So it's not a case where you go into -- when you start up and you've got to deal with Nike Australia as opposed to Nike Global [ Headco ] and Nike Australia says well you don't have scale and the terms, you can actually go out there and leverage that relationship that works in practice. Is that right?

Exactly. And look, in some parts of the world, Sports Direct actually feed those markets via their U.K. business. We don't have any plans to do that. But all of that's available to us.

Perfect. Last one, please. Just in terms of the cumulative capital you expect to deploy in the first 6 years. So to get to 50 stores, I assume the $60 million of capital is just to fund the initial at some point, rollout and then it becomes self -- as you said, self cash generative. But like if you had to look at the cumulative capital invested, how much would that be over the 5-year period, please?

Yes. I haven't said that, Aryan. So let us get to some agreements on some early stores and get them built. We've got estimates, but we need to firm those up before we talk about them. We're fairly confident on the numbers. We've got a pretty good sense, particularly as it gets to the rollout of the first 30 or so stores.

Cool. So the $60 million, you haven't also talked about how many stores that -- but there's a $60 million for 30 stores or you haven't sort of said that?

Yes, I haven't said that, and we're not going to be specific about that. As we progress and we get more confidence on our modeling, we'll share as it's appropriate.

Our next question comes from Garth Francis.

Just on the gross margin, do you expect the additional private label branding that you're getting from Frasers to -- I mean that this would be gross margin accretive to the group? And is that 57% gross margin that had been previously as a margin target talked about, is that now in your sights? Or does this new venture mean that we're -- that's not something that we should be thinking about for the business going forward?

Yes, that's a good question, Garth. Again, it sort of unfortunately, stays into the realms of commercial sensitivity. I can say that on our distributed brands, we're getting great margins. And certainly, the Frasers Group would say that their owned brands and the mix in Sports Direct is an absolute key strategic advantage from a margin perspective of the Sports Direct model vis-a-vis a third-party only model. So hopefully, that helps.

Great. And then can you maybe just talk about whether or not this has changed your view on the rollout of any of your brands, whether that's -- or the other banners, whether that's positively or negatively?

But no change to any of our other banners is the simplest answer. We're going to continue to do what we were doing strategically with all of our other existing banners, Garth. Sounds like we might have run out of questions.

Our next question comes from Christian.

Just one question. How long do you think it would take for the stores to mature?

Well, that's a good question. Christian, isn't it? Look, we've again got some modeling assumptions around that. But again, I prefer not to say much about that until we get into it. This is a brand-new area for us in Australia. So watch this space is probably the best answer on that. There's no doubt in my mind with a new banner and a new brand to the Australian consumer as we roll out stores, there will be a ramp-up period. And we just have no real sense of what that might be at the moment.

And we have a follow-up question from Aryan Norouzi again. Go ahead and ask your question. It seems that was an error. At this time, there are no further questions. I would now like to pass it back to the team for closing remarks.

Well, thank you all for your time today and for listening to us. We're excited at this end, and we look forward to updating as we move forward. Thank you all.

Thanks very much, guys.