Accent Unlikely to See Recovery to Prepandemic Margins

In contrast to many of its brick-and-mortar retailing peers, we think Accent can keep rolling out stores at an above-population-growth pace over the medium term. Accent is disciplined in its approach to new stores, targeting an aftertax return on investment of at least 20%, significantly above our 10% weighted average cost of capital, or WACC, assumption. We think Accent’s rollout will be driven by monobranded stores under its exclusive distribution agreements with trendy labels such as Hoka, and its vertically owned banners Nude Lucy and Stylerunner. New stores will likely be in outer metro and regional areas. While these stores are typically lower turnover, lower rent means that margins are comparable with metro locations. As the store network expands, sales should increasingly shift away from wholesale and toward the higher margin, albeit more capital-intensive, retail channel. Channel mix shift toward retail provides some support to margins over the medium term. We forecast a midcycle EBIT margin of 8%, reflecting our assessment of the industry's pricing dynamics and the long-run competitive environment.