Why I think RCG Corporation Ltd is the best retail stock to buy today

RCG Corporation Ltd (ASX: RCG) is Australia’s largest speciality footwear business with a market capitalisation of $774 million. It’s known for its brands like CAT, Merrell and The Athlete’s Foot.

RCG’s network of stores reached 319 by the end of the 2016 financial year and by the end of the 2017 financial year it’s expected to have 417 stores. During FY16 it grew its underlying net profit after tax by 141.6%, an amazing result for a bricks-and-mortar retail business.

What was the cause of this growth and how will RCG keep growing?

RCG purchased Accent Group

Accent Group was responsible for the marketing and distribution of a number of global and apparel brands in Australasia including Vans, Skechers and K-Swiss.

Accent Group contributed $42.8 million of RCG’s total $60.4 million underlying earnings before interest, tax, depreciation and amortisation (EBITDA). It’s quite rare to see an acquisition make up so much of the parent company’s overall earnings.

The like for like (LFL) sales growth for Accent Group’s stores during FY16 was 20%, which shows the strength of its brands.

RCG purchased Hype DC in July 2016

Hype DC is an Australian retailer of ‘branded athleisure and style footwear’. This new purchase should add to RCG’s earnings for the rest of FY17, as it opens a net of six new stores.

Continued good performance by The Athlete’s Foot

The Athlete’s Foot is thought of as having excellent customer service, with its unique ‘Fitzi’ technology to analyse a person’s feet to assess what shoe would be best for the customer.

It achieved LFL sales growth of 3.5% and EBITDA growth of 3.8% for the 2016 financial year. The Athlete’s Foot is in the process of testing new pilot stores which are smaller, but deliver higher sales with smaller costs. This will boost EBITDA if it can succeed with transitioning more of its stores into this format.

Footwear retailing seems different to most other retail stores

A lot of other retail stores have been disrupted by internet shopping, particularly in the USA. However, the U.S. company Foot Locker has managed to continue growing its revenue, profits and share price. Most consumers like to try on shoes before buying because all shoes and feet are different and it’s extremely difficult to gauge comfort through internet shopping.

Electronic goods retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) may be in trouble if (or when) Amazon comes to Australia, as well as other retailers to a lesser extent. But, if the U.S. retail market is comparable to the Australian market, RCG should be fine.

However, RCG will need to be wary of the amount of foreign competition that is coming to Australia’s shores such as H&M and others. Online competitors aren’t a problem for now, but RCG will need to keep on top of the latest retailing methods of shoes.

Is it time to buy?

Analysts expect RCG to grow its earnings per share by 30% during FY17 (source: Commsec), which means it’s trading at 16.6x FY17’s estimated earnings. It’s also trading with an estimated forward dividend yield of 6.7% for FY17, which is quite attractive.

I’m not a fan of many retail businesses, but RCG is one of the few that I can see growing over the next few years. At these prices RCG isn’t cheap, but it could be a good addition for investors seeking diversification in the retail sector.

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Motley Fool contributor Tristan Harrison 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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