Small Caps | Aug 29 2016
Multi-brand footwear distributor and retailer RCG Corp has seen a soft start to FY17 trading but management is confident in initiatives.
-Competitive pricing pressure for The Athlete's Foot envisaged easing
-HypeDC expected to diversify portfolio and underpin leading position
-Strategy to focus on performance footwear expected to drive growth
By Eva Brocklehurst
Multi-brand footwear distributor and retailer, RCG Corp ((RCG)), has suffered a soft start to FY17, the company's trading update suggests, despite a robust performance in FY16. Management has flagged a number of initiatives taking place in FY17 which could lead to new avenues of growth and attract new, younger customers to its brands.
Morgans observes competitive pricing pressure which affected The Athlete’s Foot in July has since eased and recently-acquired HypeDC should improve as further exclusive products hit the stores. The main disappointment for Morgans is margin (EBITDA) guidance within the Accent division, which is expected to be flat. RCG has guided to gross profit margins expanding 2-3% in FY17 but flat EBITDA margins as investments are made to support its growing infrastructure.
Morgans sees value in RCG at current prices but accepts patience is now required until forthcoming updates from the company confirm momentum in sales has accelerated. The broker retains an Add rating and $1.92 target.
The company announced a new concept store at Chadstone, Victoria, will open in October and another four of The Athlete’s Foot performance stores will open before Christmas. Moelis expects HypeDC should diversify the company’s portfolio and cement its position as a regional leader in retailing and distribution of footwear. The broker lauds management’s track record, even in challenging conditions.
Management cites evidence that the global athletic/leisure trend is continuing globally, with overseas luxury brands investing in innovation and high end, premium casual footwear. RCG has guided to Accent like-for-like sales growth in FY17 of 7%. Whilst 7% growth in LFL sales is a decrease from the 15% experienced in the second half of FY16, Moelis suspects this is due to Accent cycling tough comparables rather than the end of the trend towards casual footwear.
Moelis considers the share price reaction on the back of the weaker-than-expected start to FY17 trading was excessive, as management has reiterated guidance for full year operating metrics, albeit with a skew to the second half in HypeDC and The Athlete's Foot. The broker considers the decline in the shares a buying opportunity and retains a Buy rating and $2.05 target.
Group gross margins improved to 51.2% in FY16, which beat Citi’s expectations. In analysing HypeDC’s initial trading under RCG’s ownership, Citi found the update for the first eight weeks of FY17 was, on balance, disappointing considering HypeDC grew sales at a compound rate of 24% over FY11-16. Admittedly sales in the first quarter of FY17 were affected by delayed delivery of key product lines and synergies are expected to mount.
Citi notes a significant component of growth for HypeDC over the last two years has been the strength in athletics and leisure footwear but is cautious about the maintenance of global athletic/leisure footwear growth rates. The broker expects athletics/leisure categories to outperform other footwear in the short term because of innovation and new technology – coinciding with an Olympics year — but does not believe this constitutes a permanent shift in consumer behaviour.
Citi has a Neutral rating and $1.64 target. The broker concludes that the company has a strong, but slowing, like-for-like growth profile while maintaining a material roll out plan for its stores. The broker also notes the stock is trading at a 61% premium to domestic discretionary retail peers.
The start to FY17 was solid, Bell Potter contends, despite the bumpy entry for HypeDC. Accent achieved impressive growth and the broker believes there is significant scope for store network expansion and leverage from The Athlete’s Foot IT and scale benefits. Skechers remains the most important brand for the Accent division, Bell Potter contends, with a planned footprint of 120-150 stores in Australasia.
The broker applauds RCG’s decision not to indulge in discounting at The Athlete’s Foot and believes the strategy to focus more on the consumer of performance footwear will drive growth from repeat purchases and be accretive to store margins. Bell Potter has a Buy rating and $2.15 target.
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