Is this ASX retail company about to blow up?

The RCG Corporation Ltd (ASX: RCG) share price has been smashed but, man, it looks cheap. And I doubt it is about to blow up!

RCG share price

RCG share price

Source: Google Finance

Who is RCG Corp?

RCG is a footwear retailer and the name behind stores like The Athlete’s Foot, Platypus, Podium Sports and Hype DC. It is also the exclusive distributor of brands such as Merrell, CAT, Saucony and more.

The company has grown largely by acquisition of other brands and growth in the number of store fronts.

Why is it falling?

You would be nuts to use a share price chart as a signal to buy and sell ‘investments’, in my opinion. However, the massive selloff in RCG Corp’s share price warrants closer inspection.

I think the recent selloff can be explained by a few smaller concerns, but a big elephant of a risk, too.

Firstly, earlier this year, the Co-CEO’s of Hype DC, one of the company’s acquired businesses, retired. I don’t like it when good managers retire, let alone when founders walk.

Secondly, sales and profit growth appear to be slowing. At the beginning of May, the company said: “sales performance across all business units for the months of March and April combined…have fallen short of management’s expectations.”

Oh boy.

Then, less than a month ago the company announced that around 143 million shares in RCG Corp were due to be released from escrow earlier this week, meaning they could be sold. They are worth around $82 million — almost a quarter of the total worth of the company.

Why do people get nervous when shares are released from escrow?

Investors fear escrowed shares could flood the market and force the share price down.

The elephant

Finally, Amazon is coming to Australia. Amazon is the global e-commerce retail heavyweight, giant, monster, gorilla… call it whatever you want. Amazon’s bread and butter is in the selling of small online goods, clothing, electrical etc.

Companies like RCG Corp, JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) are right in the firing line.

Foolish Takeaway

RCG Corp shares have been sold off heavily in recent months, but it may be for good reason. Having said that, I do not believe it was expensive before it was sold down. I think it has gone from cheap to cheaper.

But would I buy shares in RCG today? I’m not in any rush, to be frank. Yet I would not be surprised to see it bounce back from today’s prices.

Indeed, although its enormous dividend may appeal to myopic (short term) investors, I cannot help but think that it could be akin to picking up pennies in front of a steamroller.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Amazon. 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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