Stock of the Week The Reject Shop (TRS)


The Reject Shop (TRS) is a discount variety retail company, targeted at servicing 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.

TRS operates around 200 stores across the country, a milestone number the group achieved in FY10.

The company struggled over 2008 as the global economic downturn hit retailers, even those that offer household goods at low prices such as TRS.

However, with consumer sentiment in Australia strengthening, TRS has managed to report decent FY10 results and even continue with its growth strategy of opening new stores.

Stronger consumer environment

When the global economic downturn hit in late 2007, the retail industry was one amongst many to suffer.

Consumer spending slowed down on a global scale as rising interest rates, continual rises in petrol prices and general negative sentiment regarding funding saw consumers deciding to keep their money in their wallets.

TRS actually escaped the worst of the carnage, as evidenced by the stock’s chart over late 2007 through to early 2009.

The company’s stock faced volatility over this period, though arguably not to the extent of retail sector peers such as Harvey Norman or David Jones, whose goods are more expensive than those offered by TRS.

TRS offers a mix of quality, low price basic everyday items and bargains, and as such the group attracts more price-conscious consumers.

The environment for consumer spending is strengthening in Australia. Recent data has been supportive of growth for our economy, including upbeat jobs data and GDP growth results.

With the RBA leaving the official cash rate on hold – yet again – at 4.5% at its September meeting, the recent steadiness in interest rates allows consumers to spend more on household goods.

Recent results

On 18 August, TRS announced FY10 net profit after tax (NPAT) of $23.4 million, an increase of 22.9% on the prior year and slightly ahead of previously provided guidance of $22- $22.5 million.

Underlying earnings grew by 15.4% over the prior year, whilst sales increased 14.2% to $470.8 million.

TRS declared a final dividend of 28 cents per share, reflecting a continued dividend payout ratio of 75%.

This brings the full year ordinary dividend to 67 cents per share, up from 55 cents per share last year.

The company has forecast NPAT for FY11 of $26-$26.5 million, up 14%-16% on a normalised FY10 NPAT.

Behind the numbers

TRS’s Managing Director, Chris Bryce, noted the FY10 result was a pleasing one as the company balanced a challenging retail environment with strategic initiatives during the year.

The overall trading result was sound despite moderate comparable stores sales growth as gross margins improved. TRS was able to successfully open 27 new stores during the year, which is a company record.

Moreover, comparable store sales growth of 1.0% was reported amidst these volatile retail conditions.

In the past two years, TRS has implemented SAP and opened an Ipswich (QLD) distribution centre, together representing an overall capital investment greater than TRS’s FY10 profit.

Coupled with the introduction and expanded use of overseas consolidation centres, it means TRS has significantly changed its supply chain in a very short time.

The Ipswich distribution centre is now fully operational and servicing more than 80 stores in NSW and Queensland.

TRS has remained steadfast in its growth plans, having invested in infrastructure expansion over the last two years. This lead to the group opening up its 200th store in Broadway (Sydney) in August.

The historic store opening represents the halfway point in TRS’s long-term plan to have 400 stores nationally.

Outlook

TRS offers a mix of quality, low price basic everyday items and bargains, and as such the group attracts more price-conscious consumers.

The environment for consumer spending is strengthening in Australia supported by a booming economy.

TRS’s FY10 trading result was sound, despite moderate comparable stores sales growth.

Looking ahead, TRS forecasts FY11 to be another challenging year with the overall economic outlook uncertain. However, TRS released this guidance before more recent upbeat data confirming economic and consumer spending growth in Australia.

Already TRS has opened three stores to date in FY11 and the group has 12 store openings planned for the first half and 17 new stores for the year.

Sales for the first six weeks of FY11 have been pleasing, boding well for a stronger coming year for TRS.

TRS has bottomed at the end of 2008 at bounced at the support level around $9.00 on a number of occasions. Since then, TRS has climbed consistently and recently broke above the $17.00 resistance level which and may be one of the stocks to buy on the share market.

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