This was published 11 years ago
Motley stock of the week: RCG Corp
Each week, Motley Fool investment analyst Scott Phillips highlights one attractive stock you can add to your radar.
By Scott Phillips
Here's the understatement of the year: for retailers, the opportunities and threats from the internet are a big deal.
But as an investor, rather than running for the hills, I'm using the opportunity to hunt for overlooked, unloved and undervalued retail stocks, like the one I'll highlight below.
The Athlete's Foot, owned by RCG Corporation, has posted an increase in sales despite a declining market.Credit: Stephen Wark
The problem with a sweeping statement about the impact of the internet is not that it's wrong – it's indisputably true – but that for many people it gets taken to extremes.
It's akin to taking the comment that swimmers can be killed by sharks and suggesting no one should ever go swimming. The risk is there, but it doesn't mean we overreact to it.
The internet revolution
The internet has bought many changes to retail. It has made pricing more transparent, shopping more convenient, and has made the world a truly global marketplace – where exchange rates can be used to consumers' advantage.
It has also revolutionised some products, chiefly those that can be supplied digitally, such as books, movies and music. Those changes are undeniable. For consumers, they're also almost universally welcome.
For investors, the internet has been a wonderful democratising agent – making company information widely and immediately available, making buying shares cheap and easy and allowing financial advice and education to be made more accessible. There have been downsides here too, though – along with easy and instant access has come more active trading and perhaps less considered decisions, given how easy it is to click "buy".
A bit of perspective
But for all that the internet represents in risks and opportunities for retailers, we need to keep it in perspective. Even in the US, the home of online commerce, only 8 per cent of retail sales are made online. It also has a disproportionate effect on certain products – such as the ones mentioned above, while hardly touching others.
The other argument made against traditional retail is that we have a "new" consumer – a permanently changed shopper who bears the mental and emotional scars of the past few years.
There's no doubt that consumers are holding their purses and wallets tightly but it won't always be that way. Remember the "greed is good" 1980s? We apparently learnt our lesson in the early 1990s recession. We were going to be different.
Except then we weren't. Fifteen years of good times and we forgot all about the lessons we'd learnt.
Around and around we go
Then the financial crisis hit. Well, not so much hit as happened overseas, and we were like the kid who needs to put on a jacket because mum is cold. We have had no recession. No unemployment jump. House prices have cooled, but there's no popping of a bubble. Retail spending slowed, but continues to grow.
Beware the investor who is still fighting the last war – the economy has always moved in cycles. And it always will.
The confluence of those two pessimistic themes – that the internet will kill retail and that consumers are embracing permanent personal austerity – has created a sale all of its own. Shares in many retail companies are available at pretty attractive prices.
Opportunities among the unloved
One company that has caught my eye is RCG Corporation (ASX: RCG).
Don't worry if the name isn't familiar. RCG sounds like just another faceless industrial conglomerate, but it's the company behind the Australian operations of The Athlete's Foot, and Shoe Superstore, as well as holding the Australian rights to the footwear brands Merrell and CAT (for Caterpillar heavy equipment) footwear and apparel.
RCG turned in a respectable 7 per cent profit growth in the last financial year – not bad, considering the aforementioned reluctant consumer. The Athlete's Foot business eked out a sales increase in a declining market, with like-for-like sales recovering from a negative first half to be positive in the second.
In the first eight weeks of the new financial year, sales are up almost 9 per cent on a like-for-like basis (a level which will likely moderate through the year), and the company has launched an online shopping site for the chain.
RCG's wholesale business – which houses its licensed brands – grew strongly, thanks to the impact of the newer CAT business, and growth in its Merrell brand.
With decent growth likely over the medium term, and with some good cost management, RCG is well positioned to take advantage of the more relaxed consumer and its products tend to be online-resistant. The company also ensures its online presence caters to those buying shoes online.
Foolish takeaway
For investors, RCG is trading on a trailing price earnings ratio of 11 times and offers a trailing dividend of 7.1 per cent, fully franked.
The share price has recovered nicely, up 20 per cent since we first brought it to the attention of Motley Fool readers. But rather than anchoring to a random share price from the past, it is the future that matters. RCG Corporation is a company worthy of a place on your watchlist.
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Scott Phillips is a Motley Fool investment analyst. You can follow Scott on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).