Daily notes

Daily Notes – Accent, Lovisa, Noni B, Wesfarmers

Accent Group (AX1) – Gross margin the driver… Lovisa (LOV) – UK gaining momentum, USA full rollout… Noni B (NBL) – Sales up, profit flat, but on the way… Wesfarmers (WES) – Bunnings solid…

Accent Group (AX1) – Gross margin the driver

Accent reported EBIT of $47.4m, up 25.2% for H1 19. Sales growth was okay, with H1 LFL retail sales up 1.2% and total sales, up 6.2% on the prior year. The real star of the result was the gross margin, which was up 2.8%  to 57.3%, reflecting the company’s focus on vertical brands penetration and the strategy of reducing discount-driven retailing compared to the prior year.

The company opened 35 new stores during the half, refurbished 15 stores and closed 16 stores, with a further 18 stores to open in H2 19 and potential for 30-40 stores in the next 2-3 years.

Overall this was a sound result. Continued growth is reliant on opening new avenues to deploy capital. In the near term, this will take the form of continued new store openings as well as purchasing of franchised TAF stores. The company is also exploring international expansion, however, so far nothing has met return requirements.   

Lovisa (LOV) – UK gaining momentum, USA to full rollout

Lovisa grew total sales 12.3% to $133.2m from acceleration in store rollouts. Difficult conditions in the Australian market, as well as the cycling of strong comp sales from the prior year,  impacted comparable store sales, which printed -1.8 %. CODB increased by 230bps to 50.4% affected by continued investment in a global support structure and new territory expansion combined with the impact of negative comp store sales. EBIT increased by 5.1% to $36.5m for the half year.

The main story is that the concept seems to be travelling well, with the number of international stores growing and offshore territories now 58% of the total store network. In particular, the UK store rollout continues to gain momentum with 12 new stores opened during the H1, bringing the total to 36. The UK has an estimated capacity of 100 stores.

Also, the performance of the US and France markets through the Christmas and post-Christmas sale periods has given the company enough evidence to pursue full rollouts in both those regions, which represents a significant further long-term opportunity for the company.

Noni B (NBL) – Sales up, profits flat, but on the way

The acquisition of the loss-making Specialty Fashion Group brands for $31m in July 2018 more than doubled the company’s size. At the time, the company anticipated restoring the acquired brands to EBITDA break-even in FY19.  They are now expected to achieve positive EBITDA for the current FY19 year.

Like for like sales growth is still a challenge, printing -3.1% for H1 19 with improvement in December to +1%. However, the company was still comfortable reaffirming its EBITDA guidance of approximately $45m for the full FY19 financial year.

The company expects the full year benefit of synergies, together with improvements in gross margin, to result in FY20 EBITDA exceeding $75m.

Achieving this will make the $31m purchase price for Specialty Brands look cheap indeed, which will be all the more impressive if delivered in an environment of negative same-store sales growth.     

Wesfarmers (WES) – Bunnings solid

As Bernard Salt wrote in the Weekend Australian last week, lifestyle has replaced mateship as the essential touchstone of the nation’s character. No company has benefited more from this than Wesfarmers and their flagship Bunnings, and this result was further confirmation of this premise.

Most retailers have struggled for same-store sales growth during HY 1 19. Bunnings achieved 4% sss growth, with total store growth of 5.5%. The company achieved this growth despite cycling high levels of growth in H1 18, high rainfall on the East Coast and softening in conditions in the residential housing market. EBIT increased by 7.9% to $932m and now accounts for approximately 57% of Wesfarmers total EBIT. EBIT margin grew slightly from 13.2% to 13.5%.

Kmart group was more reflective of the broader retail sector with total sales growth of 1% and a modest decline in comparable sales driven by underperformance in apparel, lower growth in non-seasonal products and an exit from the DVD category. EBIT decreased by 3.8% to $383m. Kmart group now accounts for 23% of Wesfarmers total EBIT. EBIT margin moderated slightly from 8.6% to 8.3%.

Officeworks achieved total revenue growth of 8.2%, with no mention of same-store sales growth. EBIT grew 11.8% to $76m, while EBIT margins increased slightly from 6.7% to 6.9%.

The industrials business was mostly flat for H1, with EBIT of $227m down 2.6% from $233m in the corresponding prior period.

Despite the balance sheet strength following the divestment of Coles and the amount of free cash flow generated by this business, there was no mention of new opportunities to deploy capital, other than to say that they are on the agenda.

By Danny Sandler

Founder of Ocean Asset Management.