Shares To Buy: The Reject Shop (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.

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.

News Corporation (ASX:NWS) is a diversified media conglomerate with interests in all geographic locations around the world, and in all facets of the media. The principle activities of the company include printing and publishing, books and magazines, television broadcasting and production including both free to air and pay television, and film production and distributions.

Today, ASX 200 listed News Corporation announced its December quarter earnings, showing a net profit of $984.49 million up 65% compared to the same quarter a year ago.

The earnings rise came despite a $33.44 million cost for restructuring the group’s British and Australian newspaper divisions.

NWS reaffirmed its outlook for 2012, saying it still expects the company’s overall operating income to rise in then low-mid double-digit range for the year.

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News Corporation (ASX:NWS) is a diversified media conglomerate with interests in all geographic locations around the world, and in all facets of the media. The principle activities of the company include printing and publishing, books and magazines, television broadcasting and production including both free to air and pay television, and film production and distributions.

Today, ASX 200 listed News Corp reported 1Q12 revenue of US$7.96 billion, up  7% from  a year ago. However net profit for the quarter came in at US$738 million, down from US$775 in the previous quarter.

The fall in earnings was partially due to the $68 million, or 38%, decrease of operating income in the publishing segment. This reflected the impact from the closure of The News of World in the U.K.

The Cable Network Programming, Filmed Entertainment and Direct Broadcast Satellite Television segments all recorded double digit revenue increases compared to the prior corresponding quarter.

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News Corporation (ASX:NWS) is a diversified media giant with interests all over the world and in most facets of media.

It is also considered among the global market’s blue chip stocks.

NWS thus has a wide range of household name services and assets under its belt, including Fox Filmed Entertainment, Twentieth Century Fox Television, Fox Sports, book publisher Harper Collins, the New York Post in the US, web services Photobucket and MySpace, and Dow Jones.

The news giant has made headlines lately following its $12.48 billion bid for pay television operator British Sky Broadcasting Group.

It is also embroiled in a British media scandal following some phone hacking allegations.

NWS continues to suffer from declining earnings and the negative impact of a stronger Aussie dollar.

Scam doldrums

NWS has been experiencing heightened scrutiny amid phone hacking allegations. Pressure on the company has escalated to a political level and some lawmakers are now demanding the deal be blocked.

Allegations of phone hacking and illegal payments at News of the World, one of NWS’s British newspapers, resulted in the paper being shut down.

NWS feels its proposed acquisition will not lead to there being insufficient plurality in news provision in the U.K.

The matter has now been referred to the Competition Commission with immediate effect after the US company withdrew undertakings to satisfy antitrust requirements.

The undertakings included spinning off BSkyB’s 24 hour news channel, Sky News, to alleviate concerns over the extent of its influence in the U.K. media landscape.

A decision could take up to 32 weeks but with the current allegations, the matter might be dragged even longer.

Fresh allegations have also seen another one of NWS’s British newspapers, The Sun, come under fire.

Monetising the net

NWS recently announced it will start charging for access to the online version of The Australian newspaper.

Limited content will be available to the public, with full access costing $2.95 a week.

This follows the model News Corp introduced after it purchased the famed Wall Street Journal in 2007.

News Corporation and fellow media giant Fairfax have introduced high quality online versions of their flagship newspapers in the last decade and if the paid access model works with The Australian, it is expected other key newspaper sites across the stables will start charging for their content.

Earnings not newsworthy

In May, NWS advised that third quarter net profit fell 24% from a year earlier to $639 million.

Net income was $639 million (24 cents a share), down from $839 million (32 cents a share) on year.

The result came on the back of a 6% decrease in revenue to $8.26 billion, which NWS attributed to weakness in its filmed entertainment and publishing divisions.

Weighing on the results was a $125 million charge in its publishing division stemming from a legal settlement and declines in the media company’s movie and newspapers businesses.

However, the cable division was a bright spot, with operating earnings rising 25% on-year amid stronger advertising revenue.

The poor profit result, which missed analyst estimates, saw NWS shares drop 3.4% on the day.

Looking ahead

NWS seems to be in a world of trouble at the moment following the phone hacking scandal.  It is also being considered among the shares to sell, and has recently been a major underperformer in the Australian stock market.

The company is already facing a loss of revenue through the shutting down of its News of the World newspaper.

Current fears are that the scandal will spread to its other newspapers along with a public and political backlash.

In a world where media is already a tough industry, the last thing NWS needs is a bad reputation.

NWS is currently working on introducing charges to online newspaper access. The latest scandal certainly does not help its cause.

With the proposed BSkyB acquisition in limbo, a deepening scandal and declining earnings, we feel NWS will remain under significant pressure.

A strong Aussie dollar will also add to the company’s demise as its US dollar earnings convert to less AUD.

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