Why the RCG Corporation Limited share price is up 17% today

Credit: Daderot

What: Shoe retailer RCG Corporation Limited (ASX: RCG) which operates The Athlete’s Foot retail brand along with holding distribution licenses for a range of leading footwear brands has announced the $105 million acquisition of Hype DC.

So What: The agreement will see RCG acquire Hype DC – which operates 60 stores across Australia -for a multiple of six times normalised FY2016 earnings before interest, tax, depreciation and amortisation (EBITDA).

Hype DC had total group sales of approximately $120 million in financial year (FY) 2016.

In commenting on the strategic rationale for the acquisition, management highlighted the following six reasons:

  • Earnings accretion
  • Portfolio diversification
  • Opportunities of scale
  • Enhanced vertical strategy
  • New retail formats
  • Complementary management skills

Now What: RCG has provided guidance that it expects EBITDA for FY 2016 of around $60 million, which is at the top-end of its guidance range. Importantly, RCG has also stated that it is targeting an underlying EBITDA figure of $90 million for FY 2017.

With the share price surging around 17% higher this morning, investors are obviously positive about the Hype DC acquisition. It’s a reminder that niche retail operators such as RCG, Premier Investments Limited (ASX: PMV) and Vita Group Limited (ASX: VTG) can achieve strong growth during a store roll out stage, brand extensions and via bolt-on acquisitions.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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