MENU

Will the RCG Corporation Ltd share price rebound higher?

Credit: Daderot

On Monday, shares in Australia’s largest footwear retailer RCG Corporation Ltd (ASX: RCG) plummeted over 28.5% after management announced a second profit downgrade in the space of three months.

Investors spoke with their feet and headed for the exits (presumably not in Skechers), as the once high-flying owner of The Athlete’s Foot, HYPE DC and the Accent Group (which in turn owns Dr Martens, Vans and Platypus shoes amongst others) said tough retail conditions continued to impact sales.

Whilst this competitive retail environment sentiment is shared by listed discretionary retailing peers OrotonGroup Limited (ASX: ORL) and Myer Holdings Ltd (ASX: MYR), I think the savage sell-off in RCG’s share price may be overdone. Here’s why.

Company financials

Make no mistake. Two profit downgrades in the space of a quarter is inexcusable for any company.

However, there also comes a point when investors need to look past the market noise and assess an investment on its merits. In this regard, I believe RCG’s current share price stacks up well against its future prospects (and downside risks).

Earnings & profit

For the half-year ended 25 December 2016, RCG recorded a whopping 42% increase to underlying earnings (EBITDA). This translated to a 17% increase to earnings per share on the prior corresponding period.

Underlying net profit after tax (NPAT) for the half swelled 34% to $23.3 million, with like-for-like sales growing 7.6% in RCG’s Accent Group division – a standout result.

However, the good news appeared to end there with management announcing in February that full-year EBITDA was likely to fall to $85 million to $88 million (down from previous guidance of $90 million).

Outlook

On Monday, RCG added to its woes by reducing full-year underlying EBITDA guidance again to $74 million to $80 million. Though this is a stark 18% departure from its guidance of $90 million at the end of FY16, investors must remember that the downgraded guidance still represents an admirable 22.5% growth rate from its 2016 full-year earnings of $60.4 million.

Strong footing

Even though the profit downgrade is nothing to be sneezed at, investors must put it in context of the near 60% drop in share price since the start of 2017.

Driving this decline is also fears of Amazon’s impact on Australia’s retail market. Though Amazon is a real threat for footwear retailing, I believe RCG is well placed to weather the storm given its strong brand names and vertically integrated network.

Foolish takeaway

One thing I am wary of is that profit downgrades come in droves.

As shareholders of iSentia Group Ltd (ASX: ISD) and Vocus Group Ltd (ASX: VOC) have experienced, management seldom gets profit downgrades right the first few times around. As such, there is potential for the company to announce a further downgrade if retail conditions don’t pick up any time soon.

Though this is a real prospect, based on Tuesday’s closing price of 70 cents per share, RCG’s shares trade at a forward price-earnings of about 8.5x (if lower end of guidance is achieved) and a trailing fully-franked yield of 8.6% (if dividends are maintained). This makes it extremely cheap for a company delivering profit and earnings growth.

Accordingly, whilst risks remain around Amazon’s arrival and further profit downgrades, I believe the current share price of RCG demands a closer look as a speculative buy.

If speculative investing is not your thing, then check out this rock solid DIVIDEND PICK FOR 2017!

Attention investors: The Motley Fool's dividend expert Andrew Page has just released his #1 dividend stock for 2017. Chances are you've never heard of this little company, yet it's a fast-growing consumer favourite - with the shares up 155% in just the last five years! Even better, it's throwing off loads of cold, hard cash. As we speak, these shares are trading on 4.2% dividend yield, fully franked (6.0% gross). Making it a 'best bet' for growth AND income... No credit card required.

Simply click here to discover the name, code and a full investment analysis in our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool contributor Rachit Dudhwala 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.