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Retail Challenges Step Up For RCG

Australia | Mar 01 2017

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

Footwear distributor/retailer RCG Corp has flagged a soft start to the second half, raising concerns about the resilience of athletic/leisure wear trends.

-Disappointing performances in key brands since New Year
-Valuation now factoring in a slowing in the athletic/leisure trend
-Revamped The Athlete's Foot stores delivering higher like-for-like growth

 

By Eva Brocklehurst

The second half has started out as challenging for footwear retailer/distributor RCG Corp ((RCG)), which has downgraded its FY17 guidance by -2-6%, primarily as a result of soft sales across all divisions. Management suggested conditions have been difficult since Boxing Day. Brokers note the company's growth outlook is highly reliant on the Skechers brand and a strong trend in athletic/leisure wear.

Slowing second half like-like sales at RCG are consistent with the slowdown experienced at Super Retail ((SUL)) in its leisure segment, Citi observes. Retail conditions have been patchy and the weakness noted by these two businesses may increase the debate around the sustainability of the trend in athletic/leisure wear.

The broker reduces FY17-19 estimates by -7-16% to reflect this slowdown in sales and lowers the target to $1.23 from $1.58. A Neutral rating is retained. Citi believes the current price-earnings multiple appropriately reflects the upside from RCG's planned roll-out of stores, combined with the downside from slowing sales trends.

The broker also flags a disappointing performance at Hype since it was acquired last year although, at the time of the acquisition, analysis revealed that Hype was coming off to exceptional years in terms of performance.

First-half results were below expectations despite operating earnings (EBITDA) growing by 36.5%. Morgans observes the strong earnings growth was underpinned by the extensive rolling out of stores and a five-month contribution from Hype. The broker believes Hype and to some extent, Accent, have been affected by a lack of innovation and differentiation in products as well as the challenging retail conditions.

Morgans believes differentiating between Platypus and Hype is now very important, given the stores are increasingly close together and developments in this regard will be watched closely.

The broker calculates the stock's valuation now factors in a slowing of the trend in athletic/leisure wear from a very high growth rate. Patience is required, Morgans believes, and the fact that the shares of the founders of Accent are out of escrow in May this year could also weigh on the stock. Morgans upgrades to Add from Hold. Target is $1.32.

Moelis is disappointed in the downgrade but believes the resulting sell-off in the stock is an over-reaction. On a 12-month view Moelis considers RCG attractive, given currency and synergies which should become tailwinds in FY18. A Buy rating is retained with a $1.70 target.

Accent stores stood out in the first half but the weak start to 2017 is an issue for Moelis. Sales growth of 7.6% at Accent was boosted by strong Christmas period, but in the second half to date like-for-like sales growth is 5.3%, substantially less. The company has blamed this on weaker consumer sentiment rather than increased competition.

Increased Competition

RCG believes increased competition will manifest in a continued consolidation of the industry rather than margin compression. Moelis is concerned about the slowing trading conditions for Hype in the second half, which it estimates posted sales growth of over 5% during the Christmas period, but suspects Hype will be cycling easier comparables in the second half.

Beyond FY17, the broker envisages a number of avenues for growth in Hype. RCG will introduce the Vans brand into the stores in July, citing the potential for number of strategic benefits and cross-selling synergies.

The broker also understands that new performance The Athletes Foot stores are delivering higher like-for-like sales growth and will continue to be rolled out across the network. Moelis considers RCG a quality retailer with excellent management and expects the company to make further acquisitions once Hype and Accent are fully integrated.
 

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