Share to Sell: The Reject Shop Limited (TRS)

The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations.

TRS offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

Shock trading update

TRS shocked the market late last month when it warned that 1H14 net profit was likely to $16.6 – $16.9 million, down on last year’s $20.1 million.

First half sales growth of 17.7% was almost exclusively due to new store openings, as comparable sales were actually flat overall.

TRS blamed the weak same-store sales result on a poor performance from stores in major shopping centres.

This contributed to a weaker-than-expected gross margin, as the group was forced to mark down prices more than it had wanted to.

This is a worry as the group spent heavily on new stores during the half, suggesting magnifying the pressure on its profit margins.

Consumer confidence falling

The operating environment continues to remain challenging for retailers. The latest Westpac Consumer Confidence survey showed confidence slipping to a six month low.

The index dropped 1.7% to 103.3 in January and is down approximately 7% from the peak reached towards the latter part of 2013 (illustrated below).

Source: Bloomberg

Although the latest reading is above the 100 level that indicates the number of optimists outweigh the number of pessimists, the trend in confidence is nonetheless heading in a negative direction.

Amid the recent global market turbulence and rising domestic unemployment we think confidence is will continue to deteriorate in the short-to-medium term.