Australia | May 02 2017
Footwear distributor/retailer RCG Corp has issued its second downgrade to guidance in three months but brokers diverge in their reactions to the news and resultant sell-off.
-All divisions performing below expectations since mid February
-Debate continues over the sustainability of the athletic/leisure trend in shoes
-Is the stock cheap now?
By Eva Brocklehurst
Retailing weakness continues to dog RCG Corp ((RCG)), with earnings guidance for FY17 downgraded for the second time in three months. Like-for-like sales for both Accent and Hype were flat in March and April, below expectations, and wholesale divisions have also performed below management's expectations since mid February.
That said, Accent, Hype and RCG brands have reported better momentum in March and April versus negative like-for-like sales in the first seven weeks of the second half. This improvement is not considered altogether surprising, given the company was cycling easier comparables.
Moelis estimates flat like-for-like retail sales in FY18 for all divisions, noting the company will be cycling tough comparables in the first half of FY18. The broker suspects that the full benefits from integrating Accent, Hype and the rest of the company's divisions will not be realised until FY19.
Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, downgrades to Hold from Buy and applies a 30% discount to its rolled-forward valuation, giving a target of $0.65, on the back of the outlook for a weaker retail landscape and increased risk around the store roll-out.
Citi forecasts FY17 operating earnings (EBITDA) of $73m, at the bottom end of the company's $74-80m guidance range but believes the stock is now on the radar for value investors, after a 47% fall in the share price since the first half result.
The broker moves the other way, upgrading to Buy, based on the valuation appeal, as the stock is now trading at -40% discount to the ASX300 and a -23% discount to Australian retailer peers. That said, while retail conditions may have been patchy, the broker expects the company's sales weakness to fuel the debate regarding the sustainability of the athletic/leisure trend in shoes.
Citi reduces its target to $0.88 from $1.23, as a result of lower earnings estimates and applies a 25% discount to relative valuation to reflect the multiple headwinds that are facing the company.
Store Numbers
Citi expects the store base to increase by 19% by FY21, even when factoring in a view that long-term targets are optimistic, slowing its assumptions regarding the rolling out of stores and now expecting 15 new stores in FY18, 53% below prior forecasts.
The broker envisages higher execution risks over the short term from the accelerated rolling out of stores, particularly as the company is in the process of integrating two large acquisitions.
There is a risk the company could relax its discipline on site selection, leading to sub-optimal locations or leases. The accelerated roll-out will also require additional purchases and place pressure on working capital as new stores ramp up.
The broker has also decreased long-term store targets for Skechers to 100 and Hype to 75, acknowledging there are untapped synergies from the Hype and Accent acquisitions.
Nevertheless, Citi believes RCG needs to clearly differentiate between its Platypus and Hype offerings, by increasing the price gap between the higher-end Hype and the comparatively lower-end Platypus and improving product segmentation between the two formats.
Bell Potter envisages an opportunity to improve execution at Hype but does not believe the company's business model is broken as the share price plunge would suggest. The broker considers there to be an opportunity to enhance the product mix and vertical strategy across the company's platforms and realise synergies with suppliers, landlords and service providers.
Amazon
Competitively, Bell Potter recognises that headwinds have been created with the entry of JD Sports and Amazon. RCG's strategic strengths are expected to help in this situation. such as being the owner of three market leading multi-brand retail platforms.
The company is also a preferred partner with key owners of the brands it distributes and has leverage to retain and win exclusive distribution agreements. Bell Potter, not one of the eight monitored daily on the database, has a Buy rating and $1.18 target.
Moelis, whilst believing that the company is better placed than most retailers to withstand the increased competition from Amazon, finds it hard to envisage how the macro economic background will improve in the next 12-18 months.
Morgans downgrades to Hold from Add, having upgraded to Add only back in February. Implicit in the broker's new assumptions is a continuation of the second half sales trends over the remainder of the year. The broker's target. To $0.68 from $1.32.
Despite the severe share price reaction in the discounted multiple, Morgans awaits a return to positive momentum before becoming more comfortable with the stock. The broker also suspects that noise surrounding Amazon's entry is likely to affect the share price performance in the short to medium term, despite RCG being a market leader in footwear retailing.
Additionally, while the founders of Accent are not sellers at current prices, Morgans suspects this could continue to weigh on the stock.
See also, Retail Challenges Step Up For RCG on March 1, 2017.
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