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Accent Group Ltd is running hot but retail is a minefield for investors

Shares in Accent Group Ltd (ASX AX1) as the footwear business behind the Athlete’s Foot, Hype DC and Skechers youth fashion chains printed a 52-week high of $1.59 this morning, despite the group not providing a trading update to the market since last February.

Over the past year the share price is now up close to 170% and is up around 70% since February when it revealed an underlying half-year profit of $26.3 million on revenues of $350.3 million. The half year profit and revenue were up 13% and 16.5% respectively on the prior corresponding period.

At the time I was running scared about being charged with theft by the police after picking up shares for 59 cents in mid 2017 on a 10% yield and estimated earnings multiple of 6.5x.

Since then my investment is up nearly 200% including dividends as investors decide the impact of Amazon.com on Accent Group’s business isn’t as great as feared in the peak Amazon days of mid 2017.

Accent has exclusive distribution agreements for many of its popular brands such as CAT, Timberland, Vans and Dr Marten, which means rivals like Amazon cannot sell these brands on their own website or elsewhere.

This is one advantage Accent has in the face of retail headwinds and there are two other advantages worth noting as I see it.

One is that many shoppers prefer to try shoes on (for comfort, fit, etc) in store prior to purchasing.

While the second is that Accent itself appears to building a best-in-class online delivery business. Note that online sales grew 170% in the most recent half.

The group also flagged a strongish start to trade for the six months ending June 30 2018, with like-for-like sales up 4% for the first seven weeks of the current half year prior that ends in one month’s time.

Accent also delivered half-year underlying earnings per share of 4.94 cents, which includes the key Christmas trading period, but even if the group delivers close to 4 cents in earnings per share over the second half it still trades on around 18x estimated forward earnings with a forward yield of 4.4%. This is based on my assumptions for dividends per share of at least 7 cents over the 12-month period ahead.

Moreover, as an investor it’s important to remember that FY 2018 will soon be in the rear view mirror and Accent’s prospects in FY 2019 are the name of the game now.

Evidently the market is expecting growth, perhaps based on plans to expand into Singapore and other parts of Asia via new store openings of its Platypus youth fashion brand. Platypus’s popularity is news to me, but if Accent Group and its management team (including famed retail investor Brett Blundy) can grow the business overseas I won’t be complaining.

It’s probably institutional investors driving the stock price higher recently, who tend to have a good read on trading results via the usual methods. For now, I’d rate the stock a hold as I continue to like some of its retail operations and its growth prospects.

Accent Group, Blackmores Limited (ASX: BKL) and the a2 Milk Company Ltd (ASX: A2M) are the only three retailers I hold in a portfolio of ASX stocks that has demolished the total returns of the market by a very large margin over the long term.

As such, I’d suggest retail is a tough space right now for investors to generally avoid.

Soft wage growth, high wages, falling house prices and household debt make for tough trading conditions in an industry where competitive advantages are rare to non-existent.

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Motley Fool contributor Tom Richardson owns shares of a2 Milk Company, Accent Group and Blackmores Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Blackmores Limited. 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.

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