RCG Corporation

RCG Details

·       Ongoing weak conditions: RCG Corporation Ltd (ASX: RCG) continued to face pressure from February. March and April business performance together (which includes Easter and school holidays) is short of expectations. But, Like-for-like sales in Accent Retail as well as Hype business in March/April are in line with last year.  The Athlete's Foot’s LFL sales performance is in line for this year to date as compared to last year. On the other hand, the wholesale divisions of RCG as well as Accent business performance has been lower than expected since mid-February.The group’s vertical retail business has traded 5% lower on a LFL basis. Management gave a cautious outlook for the rest of the financial year, and accordingly revised the full-year annualized, underlying EBITDA guidance to $74 million - $80 million range.
 
·         Stimulus from  a growing e-commerce business: The group offers over 400 physical points of presence throughout Australia and New Zealand as well as integrated eCommerce capability across their TAF, Platypus, Hype, Skechers, Vans, Merrell, Saucony and CAT brands. Overall eCommerce sales have shown outstanding performance, rising greater than 65% during fiscal year of 2017 while the group expects the ongoing e-commerce performance. They invested heavily in store experience as well as in their multichannel and eCommerce capability. They launched Platypus, Skechers and Vans eCommerce sites as well as aiming to upgrade and decentralize the TAF eCommerce site during the first half of FY18. The group has a major strategic advantage in offering their customers a true Omni channel experience given their strong digital investments.  Customers have the option of buying online and picking up in store, ordering from the entire inventory range in any store and having the goods shipped direct, as well as the ability to exchange or return in store any product bought online. They have already delivered the seamless customer experience to Platypus, Skechers and Vans brands which are showing solid outcome. The group intends to use the same functionality for Hype in fiscal year of 2018 while enhancing The Athlete's Foot’s current features.

                Growing network and distribution agreements (Source: Company reports)
 
·         Stock performance: RCG stock lost over 48.5% in this year to date (As of August 14, 2017) on concerns of management interest in the group, decreasing consumer confidence and wage growth. Moreover, the market entry of Amazon is also raising concerns over the current player’s ability to fight competition. There have been concerns over the intentions of the former owners of Accent when their share escrow expires on 27 May 2017. On the other hand, the former owners who are directors of the group have confirmed that they have no intention of selling shares into the market at these levels. The directors of RCG control over 30% of the shares on issue. Management clarified that RCG business fundamentals continue to be strong. The group is strengthening their e-commerce capabilities to withstand competition of e-commerce giants like Amazon.  They have distribution rights to 10 international brands and has a presence of 400 stores across 10 retail banners. The group is on track in integrating the Hype DC acquisition into their wider business. RCG stock recovered over 16.4% in the last three months (as of August 14^th, 2017; Source: ASX) and has an outstanding dividend yield of 7.7%. Trading at a reasonable P/E, we give a “Hold” recommendation on the stock at the current price of $0.77

Retail Food Group Limited

RFG Details

·       Targeting Middle East market: Retail Food Group Limited (ASX: RFG) has entered into a joint venture with leading UAE-based businesses, the Al Hathboor Group and HKO Group, to expand their Brand System in the Gulf region. With this move, the group can realize a major untapped commercial coffee opportunities in the entire Middle East & North Africa (MENA) region. Management reported that this move came as a part of their long-term strategy to support the ongoing diversification and global expansion via the coffee roasting and Brand System licensing hubs within the Middle East, Asia and Europe. The group would have a 50% interest under the agreement, and the rest would be shared equally between their joint venture partners. Even Al Hathboor Group believes that JV with the group would enable them with their strong as well as leverage synergistic opportunity amongst their current bakery and distribution operations.
 
·         Stock performance: RFG stock corrected over 31% in this year to date (as of August 14^th, 2017; Source: ASX) hurt by weak consumer confidence in Australia. But the stock started recovering since the last four weeks and generated over 11.7% returns (As of August 14^th, 2017; Source: Google finance). The stock also has a decent dividend yield of 5.9% and trading at a reasonable P/E. We give a “Buy” recommendation on the stock at the current price of $4.94

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