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ASX retail shares for Santa’s nice list

Kate O'Brien

There’s no denying 2019 has been a difficult year for fashion retailers. The sluggish economy has combined with cautious consumer spending and rising rental costs to produce challenging conditions. Yet some retailers are outpacing the subdued outlook.

Here we take a look at 3 fashion stocks destined for Santa’s 2019 nice list.

Accent Group Ltd (ASX: AX1)

Accent Group retails and distributes performance and lifestyle footwear across 479 stores in Australia and New Zealand. The Group is Australia’s largest footwear retailer, with about 20% of the market.

Accent operates across 10 retail banners with distribution rights for 10 international brands in Australia and New Zealand. Brands include The Athlete’s Foot, Hype DC, Skechers, CAT, Saucony, Vans, Dr Martens, and Timberland.

In November, Accent Group announced it had purchased all assets of online retailer Stylerunner. Stylerunner is a premium online site for activewear in Australia and New Zealand, which boasts 600,000 Instagram followers. The transaction was structured on a cash-free, debt-free basis, and the price, although undisclosed, was described as ‘not material’.

Brands available through Stylerunner include P.E. Nation, Under Armour, Nike, adidas, Puma, and more. The acquisition provides Accent Group, which until now has been focused on footwear, with a growth platform for apparel offerings. Accent Group plans to expand the brand by leveraging supply chain capabilities and economies of scale. A strategy for bricks and mortar stores is to be developed over time.

Accent Group delivered earnings before interest, tax, depreciation and amortisation (EBITDA) of $108.85 million in FY19, up 22.5% on FY18. Net profits after tax (NPAT) were up 22.5% to $53.88 million. Earnings per share were 10.02 cents and a full year dividend of 8.25 cents per share was paid.

Accent Group currently runs 17 websites, up from 13 in FY18, and expects more than 15% of sales will be made online in FY20. Digital sales were up 93% in FY19 compared to FY18. In FY20, Accent Group plans to open at least 40 new physical stores, increasing store numbers to 519. Low single digit like-for-like growth is expected going forward, with strong digital growth.

Despite its strong FY19 results, Accent Group received a first strike against its remuneration report at its AGM last week with 38% of shareholders voting against the report, reflecting concerns about the short term bonus of 100% of base salary paid to the chief executive. If another strike is received next year shareholders will be asked to vote on whether to spill the board.

Shares in Accent Group are currently trading at $1.69, up from $1.14 at the start of the year. The company has a dividend yield of 4.90% and a price-to-earnings (P/E) ratio of 17.7.

Lovisa Holdings Limited (ASX: LOV)

Lovisa is a fashion jewellery retailer that has expanded rapidly to capture more than 5% of industry revenue. Lovisa’s range includes earrings, bracelets, necklaces, body jewellery and hair accessories. The fast fashion retailer operates from a network of 421 stores across Australia, the United States, Europe, and South Africa.

Lovisa is pursuing an aggressive international expansion plan, opening net 64 stores in FY19. The retailer recorded a 15.3% increase in revenues in FY19 up to $250.3 million from $327 million in FY18. EBITDA increased by 7.1% to $62.3 million. NPAT increased 3% to $37 million.

Same store sales decreased by 0.5% in FY19 overall, following a drop in comparable store sales of 1.8% in the first half. There was, however, a return to positive comparable store sales in the second half. Trading since the start of the FY20 financial year has continued to improve. Comparable store sales for the first 17 weeks of the new financial year were up 2.3%.

Lovisa continues to focus on expanding its store network, having opened 31 new stores since the end of FY19. There are now 33 stores trading in the US across 5 states and 61% of the store network is located outside of Australia. Currency headwinds are, however, beginning to impact the company and will continue to do so as the average USD hedge rate is expected to fall below US$0.70.

Lovisa shares are currently trading at $12.02, up 111% from $5.69 at the start of the year. The shares trade on a P/E ratio of 35.1 and a dividend yield of 2.75%.

City Chic Collective Limited (ASX: CCX)

City Chic is a plus-size affordable fashion retailer selling garments across Australia, New Zealand, Europe, the United Kingdom and the United States. FY19 marked a transformational year for City Chic as it transitioned into a pure play in the women’s plus size market. The plus size market is worth $1 billion in Australia alone, $30 billion in the United States, and $50 billion worldwide.

In October, City Chic purchased the e-commerce assets of Avenue, a plus-sized US retailer, for $16.5 million. City Chic plans to resuscitate the brand and leverage opportunities available in the US market. Access to Avenue’s customer database also offers the opportunity to introduce customers to City Chic products.

In April City Chic purchased Hips and Curves, a US based playwear and intimates lifestyle brand. Hips and Curves operates from an independent website in the US only. The plan is to introduce these customers to the City Chic brand to drive City Chic website growth in the US. Hips and Curves products will be launched in Australia in the second half of FY20.

Northern Hemisphere sales increased from 16% to 20% of turnover in FY19, with the US City Chic website a key growth driver. The online business now accounts for 44% of total sales, up from 36% in FY18. Nine new stores and three larger format stores were opened in FY19 which have performed in line with expectations.

City Chic reported comparable sales growth of 12.2% in FY19, with underlying EBITDA increasing by 25% to $24.9 million.

Through FY20, City Chic is seeking to drive high margin growth through online sales in Australia, the United States, and elsewhere. In Australia new stores will be opened where it makes economic sense to do so and stores upgraded to a larger format where appropriate sites and leasing deals are available.

City Chic shares are currently trading at $2.67, up 193% from 91 cents at the start of the year. The shares trade on a P/E ratio of 36.1 and a dividend yield of 1.5%.

Foolish takeaway

These 3 companies seem to be succeeding in capturing consumer spend where others are struggling. Clothing, footwear, and jewellery are discretionary purchases, and retail is a difficult industry to compete in. Yet in 2019 at least, Accent, Lovisa, and City Chic have all made it onto Santa’s nice list.

The post ASX retail shares for Santa’s nice list appeared first on Motley Fool Australia.

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019