The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. The group has 239 stores in Australia, which includes the 18 new stores it added in FY12.

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.

The company has two key advantages that many of its mid-to-upper market rivals don’t – a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

FY12 results

After a somewhat disappointing FY11, TRS got itself back on track in FY12. The company grew its net profit by 35.6% on-year, to $21.9 million. The addition of 18 new stores helped sales climb 9.9% over the year, to $555.3 million.

An increase in the amount of stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

The group’s balance sheet is also in a healthy position. TRS was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

A strong Aussie dollar combined with a reduction in shipping costs saw the company’s gross margin rise from 38.9% in FY11, to 44.1% in FY12.

Consumer environment

Australian retailers have been operating in an extremely challenging consumer environment, but we could be seeing a return to better conditions.

Last week saw the release of the Westpac Consumer Sentiment survey, which showed the consumer sentiment index rising 5.2% to 104.3. It is the highest level the index has been at in 19-months, and the first time over 100 in nine months. A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic.

The main reason for the uplift in the consumer confidence is likely the recent series of rate cuts, and yesterday’s release of the RBA’s minutes from the October meeting did flag the possibility of further interest rates cuts in the coming period, which in turn could see a further increase in confidence.

Outlook

TRS’s FY12 results were impressive on several fronts. The group was able to grow sales on a comparable basis, improve its margins, increase its free cash flow, record a huge jump in profit, all while paying back $16.9 million in debt.

The recent pickup in consumer confidence could not have come at a more perfect time, with the busy Christmas season just around the corner. Whilst the company declined to provide any specific guidance for FY13, we feel that with the addition of 17 new stores before Christmas, strong sales growth is all but assured.

Overall we see continued growth for TRS, which should hopefully translate to further share price appreciation.

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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.

The company has two key advantages that many of its mid-to-upper market rivals don’t – a strong Australian Dollar benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

After a disappointing finish to FY11, TRS got itself back on track in 1H12, with net profit and sales rising on the back of a resumption in operations at its Ipswich Distribution Centre.

1H12 results

TRS grew its 1H12 net profit 4% on-year to $16.6 million.

New store openings helped sales climb 6.1% to $292.8 million, but this could have been higher had TRS not face capacity constraints in the early part of the half.

These capacity constraints were due to the early-2011 Queensland floods, which impacted operations at the Ipswich Distribution Centre.

TRS was able to generate sales momentum in the second quarter, helped by improved seasonable trade and the reinstatement of the Ipswich Distribution Centre.

A strong AUD combined with a reduction in shipping costs saw the company’s underlying gross margin rise from 44% in 1H11, to 45.4% in 1H12.

This was particularly impressive considering TRS faced price deflation over the period. It also illustrates how for TRS a high AUD can provide a hedge against price deflation, unlike many other retailers.

Outlook

With the Ipswich Distribution Centre now fully functional, TRS can focus on continuing the sales momentum generated in the second quarter.

Furthermore, with inventory management back to normal, we expect TRS to further improve margins (via less stock markdowns) and build on 1H12’s strong operating cash flow performance (via better working capital management).

Although it expects a tough trading environment to persist into 2012, TRS said second half comparable sales to date were positive. We expect TRS’ new store rollout to continue to underpin sales growth into this year.

The group forecast FY12 net profit to be between 27% and 36% higher than FY11. Even taking this strong growth into account, TRS is trading on reasonable multiples and we expect this to translate into further gains in its share price.

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