Why the Accent Group Ltd share price is tumbling today

Shares in footwear retailer Accent Group Ltd (ASX: AX1) plunged 11% to $1.43 this morning amid some heavy volume with the company informing the market that 36.8 million shares previously held in escrow as part payment for the Hype DC acquisition will be released on August 4 2018.

Sometimes shares held in escrow as part payment for an acquisition may be related to ongoing performance hurdles and whether they should be included as part of a company’s market value therefore is up for debate, although today’s share price falls suggests the news has caught some in the market by surprise.

At other times the terms of an acquisition deal may stipulate that shares (offered as part payment) will be released regardless of the performance of the acquired business, although they must be held for a minimum escrow period (2 years in this case) in order to prevent the payees immediately selling on market.

Placing the shares in escrow for a minimum time frame also aligns the interests of the payees with the wider business that they now effectively have an ownership interest in.

Accent Group (formerly RCG Corp) has seen its share price nearly double over the past year on the back of a strong interim profit report last February and receding fears as to the impact on sales of cut-price online competitor, among others, in Australia.

The group owns the slightly struggling Athlete’s Foot brand in Australia, alongside exclusive rights to distribute the popular CAT, Dr Martens and Vans shoe brands.

However the jewels in its crown are the high-performing concept HypeDC and Platypus streetwear stores that belt out deafening rap and dance music presumably to egg shoppers on into spending even more money.

The group is reportedly planning on taking its Platypus store concept to the shopping hub of Singapore and elsewhere in south east Asia, which potentially provides another growth leg over the years ahead.

Foolish takeaway

It’s no secret that Australian retailers like Accent, JB Hi-Fi Limited (ASX: JBH) and Myer Holdings Ltd (ASX: MYR) are in a tough space largely due to macro conditions that include flat wages growth. As such discretionary retail is a sector full of value traps I would suggest investors tread carefully around.

However, I continue to like the outlook for Accent Group and its management team has a strong track record of delivering value for shareholders.

At $1.41 the stock is around fair value and I would rate it a hold ahead of its full year profit report to be handed in next month.

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Motley Fool contributor Tom Richardson owns shares in Accent Group and Amazon Inc.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. 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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