On Monday, discretionary retail heavyweight JB Hi Fi Limited (ASX: JBH) reported better-than-expected earnings which saw underlying profits at Australia's leading home entertainment retailer swell a whopping 36.5% for the year.
Even with this robust performance, JB Hi-Fi's share price surprisingly slumped over 4% during Monday trade as investors seemingly expected better from the company following its acquisition of The Good Guys in November last year.
Whilst JB Hi Fi's share price travails are cause for inquiry itself, one key theme to come out of its results is that the retail sector appears to be holding up well, despite the imminent arrival of 'big bad' Amazon.
Accordingly, I thought it was worth dusting-off my retail watch list to see if any beaten-down stocks have the potential to surprise this earnings seasons.
RCG Corporation Ltd (ASX: RCG) and Retail Food Group Limited (ASX: RFG) are two stocks which immediately come to mind. Here's why.
RCG Corporation
The RCG Corporation share price has endured a tumultuous 12 months after two profit downgrades in the space of three months saw its share price ravaged earlier this year.
RCG's fortunes went from bad to worse after a spate of profit downgrades by retail peers MYER Holdings Ltd (ASX: MYR) and Adairs Ltd (ASX: ADH) soured sentiment in the discretionary retail sector leaving investors fearful that the arrival of eCommerce giant Amazon will wipe out Australian retail.
Although I beg to differ about Amazon's full-impact on the retail sector, RCG's share price appears to have been caught up in the cross-fire, currently down over 55% since August last year.
Whilst part of this fall is directly attributable to reduced profit expectations, I believe the current share price involves an element of over-selling, given the company remains on track to post double-digit earnings growth if its most recent earnings (EBITDA) guidance of $74 million to $80 million is maintained.
Therefore, with management slated to report full-year results on 28 August, I believe RCG is one stock investors should keep an eye on for upside surprise.
Retail Food Group
Like RCG, Retail Food Group's share price has faced its own demise, currently down over 30% since the start of this year. The cause of Retail Food Group's share price attrition is a killer one-two combination of a UBS report outlining the impact of changes to accounting standards on Retail Food Group and a recent downgrade of full-year profit by management.
Whilst the accounting issues are systematic across the sector (and remain to play out), management's profit downgrade in June has some relevance to Retail Food Group's share price decline. However, I believe the fall has been overdone.
The crux of management's trading update was that weak trading at its franchisee stores will result in a slower profit growth rate of 15% year-on-year (compared to a forecast growth rate of 20%). The company also expects to incur a one-off non-cash write-down of $22 million as a result of irrecoverable marketing spend.
Though this announcement should not be taken lightly, management's track-record of increasing earnings and pursuing successful acquisitions (or joint-ventures) makes this stock one to watch in August.
Foolish takeaway
Admittedly, Amazon's arrival to Australia will mean greater competition across the discretionary retail sector. Whilst this is a benefit for consumers, retailers will need to pull out all the stops to churn out sales and profit growth moving forward.
As evident from JB Hi-Fi's results, this growth may come at the expense of margins. However, I believe that both RCG and Retail Food Group are capable of mimicking JB Hi-Fi's success given their strong brands and existing retail channels.
Therefore, I think the current RCG and Retail Food Group share prices have potential to provide solid upside over the long-term.
