Why Amazon Is Creating Potential Opportunities in Aussie Retail

They dominate the US retail sector. Others cannot compete on price. And they have billions at their disposal. Amazon.com, Inc. [NASDAQ:AMZN] is now coming to Australia.

Just the idea of Amazon competing against Australian retailers has caused a huge selloff in retail shares. Companies like Myer Holdings Ltd [ASX:MYR] and Wesfarmers Ltd [ASX:WES] have experienced selling pressure due to Amazon’s arrival.

One retailer being sold off is RCG Corporation Ltd [ASX:RCG]. The company owns branded stores like Hype DC, The Athlete’s Foot, and their own wholesale division. The stock is down 41.62% year-to-date.

Focus on the numbers, not the noise

Retail is a tough business. It’s extremely competitive, has low margins, and can easily change depending upon macroeconomic factors.

Yet, over the past five years, RCG has managed to grow sales, profits and equity without a hiccup. In the first half of FY17, RCG improved earnings per share (EPS) by 14.6%, while increasing dividends paid by 38%, to 16.3 million.

In May, the company announced that FY17 earnings would fall short of management’s expectations. RCG now expects earnings before interest, tax, depreciation and amortisation to be between $74–80 million.

Yet even though earnings will be lower than expected, I don’t believe RCG is in hot water. While it’s lower than previously expected, it’s still a slight increase on FY16 results.

Buy with a long-term perspective

Let’s do some back-of-the-envelope maths.

Let’s assume RCG can grow EPS by just 5% year-on-year. Within five years, EPS will be 8.9 cents per share. And within 10 years, it will be 11.4 cents per share. Over time, that’s a 62.8% increase in EPS.

But over the last five years, RCG has been able to grow EPS from 4 cents to 6 cents, which is around 9% each year.

Therefore, if RCG can continue this trend, their EPS will be 10.7 cents in five years and 16.6 cents 10 years from now. Assuming investors will pay around 15-times earnings for the stocks, RCG could appreciate 84% in five years and 149% within 10 years.

Again, this is just back-of-the-envelope maths. I’m assuming a whole lot here. But there are many more stocks like RCG that have fallen substantially this year. And a lot of the selling revolves around fears over Amazon. But unless the giant US online retailer single-handedly destroys Australia’s retail industry, many beaten-down merchants look as if they may be trading at bargain prices right now.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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