One of the worst performing shares over the past six months has been RCG Corporation Ltd (ASX: RCG):
As the chart above highlights, it has been one-way traffic for the shares over recent months and this has seen around 45% of the company's value wiped off.
Unfortunately, much of the recent share price crash has come after the athletic clothing and footwear retailer announced a disappointing profit downgrade. At the time of its first-half results, RCG cited challenging trading conditions since Boxing Day and subsequently revised its FY17 underlying group EBITDA guidance from $90 million to a range of $85 million to $88 million.
This represented a 3.9% decline in expected earnings, based on the mid-point of its revised guidance.
Understandably, the market has grown increasingly concerned about this latest development, especially since its $99 million Hype-DC acquisition appears to be performing below expectations.
The Athlete's Foot business also appears to be facing some headwinds with a 15% decline in first-half EBITDA and management targeting low-single digit like-for-like sales growth for the remainder of the year.
The RCG Brands division also performed poorly as a result of unfavourable exchange rate movements and weaker-than-expected sales.
Concerns around the arrival of Amazon.com, Inc. (NASDAQ: AMZN) into Australia and its impact on the retail landscape is also adding to the anxiety of investors and this has affected investor sentiment towards a number of listed retailers including RCG.
When these factors are taken into account, it is not hard to see why the share price has fallen as hard as it has. Furthermore, I think it is fair to say that some sections of the market are already questioning RCG's ability to meet its revised guidance, despite having already delivered first-half underlying EBITDA of $42.9 million.
The question for investors now becomes whether or not RCG can deliver on its revised guidance.
If it can, then I believe the shares are extraordinarily cheap.
At the current price of $1, the shares are trading on an estimated price-to-earnings ratio of just 12 and offer a very attractive dividend yield of around 6%, or 8.6% when franking credits are taken into account.
However, if RCG misses its guidance, then I think the shares could easily trade below $1 per share – a level they haven't traded at in nearly two years.
So should you buy?
Personally, I think the current risk-reward proposition is very compelling and I think RCG won't need to do too much right to see its share price rebound strongly from these depressed levels. With that said, RCG is probably best suited for investors with a higher than average risk appetite as the shares are expected to remain volatile for sometime to come.
