Small Caps | Nov 28 2016
Footwear retailer and distributor RCG Corp has reiterated earnings guidance for FY17, signalling low growth in its key brands.
-Accelerated roll out of Accent and Hype DC stores counters slow like-for-like sales at The Athlete's Foot and Hype DC
-Growth in The Athlete's Foot affected by decline in "lifestyle" categories and cool start to spring
-Advantages in vertical integration, platform synergies but several brokers consider the stock fully valued
By Eva Brocklehurst
Footwear retailer and distributor, RCG Corp ((RCG)), is treading carefully in FY17, reiterating its earnings guidance and signalling margins are likely to expand in the Accent division. Brokers believe the company is largely on track to achieve earnings guidance of $90m.
Slow like-for-like sales for the Hype DC and The Athlete's Foot divisions are countered by the accelerated roll-out of stores for Accent and Hype DC. Accent, which is around 60% of group earnings, has posted year-to-date like-for-like sales growth of 7%. Earnings margins are expected to be 0.5-1% higher. The company is now guiding to an increased 41 new Accent stores in FY17, of which 21 have already opened.
While the increase in new store guidance is positive for the FY17 outlook for Accent, Morgans believes this is simply a pull-forward of earnings for future years, assuming long-term store targets are unchanged at 249 by 2020. Gross margin strength has led management to upgrade its earnings margin guidance for Accent from flat to 50-100 basis points higher from FY16 and the broker believes the division is well placed to achieve an increase of 100 basis points.
The broker lowers like-for-like sales assumptions for The Athlete's Foot. The company expects sales to reveal low single-digit growth over the remainder of FY17. Sales are in line with expectations over the year to date, but growth has been trammelled by a decline in lifestyle categories, such as running shoes, Moelis observes.
This is both a function of the re-positioning of the business and also cooler-than-usual start to spring/summer which has affected sales of sandals. The broker estimates flat like-for-like sales in the first half and 2.5% sales growth in the second half, taking into account the importance of the "back to school" period.
RCG brands, meanwhile, have experienced flat wholesale sales and this is expected to be the case for the remainder of FY17. Moelis, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $2.00 target.
Morgans anticipates RCG brands will grow by low single digits. The company is still guiding to like-for-like sales growth in FY17 of 5% for Hype DC, which implies a strong Christmas period and second half. Growth in this division the most heavily skewed to the second half, and therefore the most questionable in terms of the ability to achieve the target, Morgans calculates. The broker assumes 3.5% like-for-like sales growth in FY17, which requires 7% growth in the second half.
Morgans downgrades RCG Corp to Hold from Add, reducing its FY17 forecast price/earnings (PE) estimate and moving to a 50:50 PE/DCF (discounted cash flow) weighting on the stock. Target falls to $1.62 from $1.94.
The main risks envisaged are the integration of Hype DC, a slowing in consumer spending, increased and irrational competition, as well as a further material decline in the Australian dollar. Also, Morgans notes risks include a potential loss of distribution licences with Wolverine World Wide and VF.
Bell Potter observes trading is solid across the main retail platforms and the business is well-positioned for Christmas and the critical month of January. The company's advantages lie in its vertical integration, the growth prospects in its main markets and the synergies between its platforms. These support the broker's Buy rating. Bell Potter, not one of the eight stockbrokers monitored daily on FNArena's database, retain a $2.15 target.
Citi trims its FY18 estimates by around 4%, to reflect expectations that growth will slow. The broker retains a Neutral rating, noting the stock is trading at 18 times FY17 estimates for earnings per share, which represents a 30% premium to domestic discretionary retail peers. The broker's target is $1.64.
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