The overall stock market is trading at high levels, so it has become difficult to find value. There are some shares that are trading well below their 52 week highs, but most of these are riskier due to some type of problem.
This could describe the following retail stocks as they are both trading at virtually the lowest price seen for a few years:
The Reject Shop Ltd (ASX: TRS)
The Reject Shop is one of Australia's biggest chains of discount stores with a current market capitalisation of $120 million. It has fallen substantially since last week.
It currently operates over 330 stores across Australia but didn't impress the market when it announced a trading update that comparable underlying sales are 4% lower and management are expecting a net operating loss of $5 million for the second half of the 2017 financial year. The shares have been savagely sold down by over 47%, which could prove too harsh in 12 to 18 months' time.
The share price has been volatile over the past 10 years. In a year's time its sales could grow again and the price could easily rebound.
The Reject Shop is at risk from the growth of online shopping, particularly with Amazon's imminent arrival. However, it's expected that Amazon won't arrive until 2018 so perhaps it's too early to write off The Reject Shop yet.
It's currently trading at 10x FY17's estimated earnings with a trailing grossed-up dividend yield of 14.8%, however management expect to cancel the full year dividend, so this looks like a yield trap.
RCG Corporation Ltd (ASX: RCG)
RCG is Australia's largest foot-focused retailer with a market capitalisation of $555 million and is known for stores like The Athlete's Foot. Its shares have fallen by over 46% since July 2016.
Shoe retailers are harder to disrupt by online retailing in my opinion because customers like to try on the shoe and make sure it's comfortable. RCG has a number of exclusivity agreements so it would be impossible to try on the shoe in the store and buy it online elsewhere like you can do with electronics.
Management recently downgraded how much profit will grow during FY17. It's now expecting underlying earnings before interest, tax, depreciation and amortisation of $85 million to $88 million rather than $90 million. This would still be a very pleasing result if this is what's achieved.
RCG is trading at 13x FY17's estimated earnings with a trailing grossed-up dividend yield of 8.36%.
Foolish takeaway
The Reject Shop share price could recover strongly in a year's time, but I wouldn't want to make that bet. However, RCG is expected to keep growing profit over the years ahead, so I think this could be a good time to buy its shares at a discounted price with a large dividend yield.
