About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 30 August 2016, 3:08 PM
- Sectors Covered:
- Consumer Discretionary (Retail)
- A strong FY16 result was somewhat overshadowed by a relatively soft trading update for the first eight weeks of FY17.
- The competitive pricing pressure which impacted The Athletes Foot (TAF) in July has since eased, while the softness in Hype should normalise as further exclusive products hit stores and delivery delays are resolved.
- Despite the softer start to the FY, this conservative management team has maintained FY guidance, which speaks volumes in our view.
- We see value at current prices, but acknowledge some patience is now required until upcoming trading updates reveal an acceleration in like-for-like (lfl) sales momentum.
FY16 result - no surprises following recent guidance
RCG's FY16 result was slightly above recently provided guidance with EBITDA of A$60.4m (vs guidance of cA$60m) increasing by 177% on the previous corresponding period (pcp). This strong growth was underpinned by the full year contribution from the Accent acquisition (exceptional growth) and modest growth from TAF. EBITDA fell on pcp (despite revenue +2.6%) due to margin compression resulting from the lower AUD as expected.
But the trading update was mixed
Like-for-like sales growth in the first 8 weeks of FY17 was mixed, comprising:
- The Athletes Foot (TAF) +0%;
- RCG Brands retail up low single digits
- Accent +8%; and
- Hype -7%.
While early trading in Accent and RCG Brands was in line with expectations, TAF and Hype fell short. TAF was impacted by aggressive pricing activity in July. The flat result implies the level of positive lfl sales delivered in August (not specifically disclosed) was offset by the equivalent negative level in July. The negative Hype growth was attributed to an exceptionally strong pcp (lfl sales +50%) and delayed deliveries of key product lines (since resolved). Despite the above reasons, management acknowledged the negative growth was below its internal expectations of a flat outcome. Perhaps a new message around the Hype business was the more lumpy nature of sales growth given the more high-end, exclusive nature of the products.
FY17 guidance maintained
Despite a softer than expected start to FY17, management maintained all its key FY17 guidance targets. Perhaps the only disappointment in the outlook commentary was the flagged increased costs to "support the growing infrastructure". We expect some of this will be one-off in nature.
A little shine taken off short term, but the growth remains strong
Following the results, our EBITDA forecasts are broadly unchanged (-1%). On a long term view, we see value after the recent sell-off but acknowledge outperformance may be capped until more positive lfl sales momentum is visible in Hype and The Athletes Foot.
Patience is required, but we maintain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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