Treasure Chest | Jun 06 2016
By Eva Brocklehurst
The share price of footwear distributor and retailer RCG Corp ((RCG)) has slipped back 11% over the past three months. Moelis suspects investor unease is centred on the uncertainty in the lead-up to the July 2 federal election and this is sapping consumer confidence.
Yet the latest economic data suggest retail spending remains firm. The Westpac Consumer Sentiment index increased 0.8% in May and footwear and other personal accessory retailing turnover rose 7.3% in April.
As a result, the broker views the dip in the share price as a reason to acquire the stock and reiterates a Buy rating and $1.85 target. Moelis forecasts FY16 earnings of $61.6m, above the company's guidance of $58-60m, supported by growth of 20% in sales in the Accent division. At the company's first half result, like-for-like (LFL) sales growth was reported to be 25% for Accent.
If the broker assumes management's guidance for “low double digit LFL sales for the remainder of the year” equals 10%, this implies a second half growth rate of 13.8%. In a variety of scenarios, Moelis still estimates FY16 earnings to be above management's guidance.
Accent will open an additional ten stores in the second half, of which at least two will be Vans stores. An additional 25-30 stores are to be rolled out in FY17. RCG also expects to be able to open an additional 80-100 Skechers stores over the next five years, taking the total to 120-140.
While apparel retailers suggest some softness in current conditions, the broker believes footwear is more robust. Consumers tend to prefer buying footwear in store rather than online because fit and comfort is critically important. Moreover, with the Australian dollar at around US72c, online shopping has become more expensive.
Also boding well is management's comment that returning customers were up 10% in the first half, with an improvement in the company's net promoter score. RCG has over 300 stores and exclusive distribution rights for 13 international brands. Surveys have shown that in terms of footwear, brand is important to the younger consumer. Moelis suggests this indicates customers are less likely to switch to another brand, even if it is at a lower price point.
Management expects FY16 gross profit margins will be in line with the first half, and the broker is in line with guidance on this point, estimating gross margins of 50.9% and earnings margins of 13.5%.
Another point on which Moelis believes investors should feel more comfortable is that the option to extend the Timberland distribution agreement for a further two years has been exercised, while discussions with VF Corp regarding a new long-term agreement have commenced. Discussions regarding a new long-term agreement with Stance are well advanced.
The broker also notes that Wolverine World Wide, the parent company for RCG brands such as Merrell, CAT Footwear, Sperry and Saucony, has stated that, among several other regions, Asia Pacific beat revenue estimates in the March quarter.
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