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3 surprising plays in the retail sector

Every Australian investor knows Woolworths (ASX: WOW) and Wesfarmers (ASX), operator of Coles, Kmart and Target stores, among other businesses. But off the beaten path are a number of other interesting retail plays, among them a number of promising small caps. And Mr. Market may be asking a far more reasonable price for the growth expected of these companies.

For instance, OrotonGroup (ASX: ORL), the well known handbag retailer, has a market cap of about $297 million. Shares trade for just 12 times earnings or 6.3 on an EV to EBITDA basis, and pay a fully franked dividend in the range of 7%. However, the company hasn’t yet figured out a new strategy to replace its former distribution deal with Ralph Lauren, so investors may want to wait for greater clarity.

Specialty Fashion Group (ASX: SFH), for its part, has 900 stores across Australia and New Zealand, a market cap of just $169 million, and an intriguing consumer-market position with its plus-size clothing business. The company also has a strong net cash position, with $46 million in cash and no debt. Shares trade for 19 times earnings, but on an EV to EBITDA basis of just 3.4.

But surely one of the most attractive small-cap retailers is RCG Corporation (ASX: RCG), which operates and franchises The Athlete’s Foot stores Down Under. The company, which has a market cap of just under $140 million, also has a distribution business covering Merrell, Cushe and CAT brands. Between the growing business and the generous dividend yield of 6.1%, fully franked, RCG shares will likely outperform the overall market over the next three to five years.

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Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any company mentioned here.

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