Small Caps | Nov 16 2015
-Supported by trend to active wear as fashion
-Conservative guidance may be upgraded
-Accent Group now key driver of growth
By Eva Brocklehurst
Footwear distributor and retailer, RCG Corp ((RCG)), has a strong growth outlook, being exposed to the growing casual and sportswear market.
Moelis, in initiating coverage of the stock, is confident this exposure, as well as the revitalisation of its loyalty program, will underpin future growth. The broker notes sports-inspired fashion is now being worn as part of regular attire and this goes right down to the feet.
The company is increasingly intent on providing sports shoes that have a greater focus on fit and innovation and incorporate the trend to more casual dress and active wear as a fashion statement.
The popularity of running events has increased demand for such footwear, with the broker noting people are now increasingly wanting footwear product that is recommended and properly fitted. In tandem, manufacturers have introduced sole technology to provide less strain on feet and a more comfortable fit.
The broker notes the depreciation of the Australian dollar is also making domestic retailers more attractive for consumers versus the recent inroads made by online operators.
On this basis Moelis takes up coverage with a Buy rating and $1.70 target. Beyond FY17 further growth is expected to be underpinned by the roll out of stores, an improvement in the online offering and the implementation of the revitalised loyalty program across all divisions including The Athlete’s Foot, RCG Brands and Accent Group.
The management team has strong track record of creating shareholder value, Moelis observes. The company has historically maintained a net debt position but increased its debt to acquire Accent Group in May this year. Accent is also a vertically integrated distributor and retailer which, in the broker's opinion, will be a key driver of growth. That business owns and operates 120 stores with plans to open at least 20 in FY16.
Morgans observed at the time of the FY15 results that if the Accent business continued to grow sales at the same strong rate seen at the beginning of FY16, management's guidance could prove very conservative. Morgans has an Add rating and $1.41 target.
Consensus estimates have the stock trading on a FY16 enterprise value/earnings ratio of 12.5 and a price/earnings ratio of 23.3, a premium to its peers, and Moelis suspects an upgrade to estimates is in the offing, given the strong operating momentum.
The broker's FY16 earnings estimate is $60.8m, 8.6% above the mid point of management's guidance. Moelis considers its growth assumptions are achievable but the target is reliant on an earnings upgrade being realised. The dividend yield on the broker's FY16 estimates is 3.9% and on FY17 estimates it is 5.2%.
The risks are centred a reliance on the continuation of this trend to more casual footwear. As a distributor, RCG also relies on manufacturers to develop appealing products. The company is exposed to the premium end of the market and therefore changes in consumer confidence, household income and discretionary expenditure can have an impact on sales. A loss of a major distribution licence could also impact profitability substantially.
The company has over 290 stores in Australia and New Zealand across various retail chains, with exclusive distribution rights to 13 brands. The wholesale business is expected to generate around 29% of FY16 sales. The Athlete's Foot is one of the well known business brands, encompassing both company-owned and franchised stores.
The Athlete's Foot has invested in fitting technology and customer service to differentiate itself from competitors. Moelis considers this a mature business but positioned to increase its profit growth by a revamped offering online and through loyalty programs.
The broker is confident in the near term that, via the weaker Australian dollar and consumers' desire for fitting services, the business can maintain its position as a premier retailer without significant margin pressure. Moreover, Moelis expects customer will increasingly return to bricks and mortar stores to try on products and obtain services and experiences outside of online offerings.
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