Good news out of The Reject Shop
Following on from our last discussion with The Reject Shop (ASX: TRS) last November (located here) we had another meeting with Management, CEO Ross Sudano and CFO Darren Briggs, to discuss their progress to date.
Below are some summarized notes from our meeting:
- The firm is going back to its roots by drawing in customers with everyday consumables for below market prices and then upsell higher margin products. This is what worked back in the days of Barry Saunders (CEO of the business prior to ex-CEO Chris Bryce).
- ALDI isn’t providing much competition to The Reject Shop. Instead, ALDI (like Coles & Woolies) is creating foot traffic which drives customers towards The Reject Shop. This is because The Reject Shop is differentiated by having cheap branded products as opposed to ALDI’s cheap but unknown brands.
- SAP Solution (that will enable individual stores’ inventory to be adjusted automatically depending on local consumer tastes and buying trends) is being implemented, however it is unlikely to be finished until the end of this year. After which the data collection process will begin and revenue can be depicted from the results.
- Management feel that they have got the balance between television and catalogue advertising correct – catalogues drive foot traffic and television tends to drive up basket size.
- Christmas went well for the firm with comparable sales at +0.6 per cent relative to last year.
- A weaker Australian Dollar naturally makes finding inventory at an affordable price more challenging but still possible.
- A lot of opportunities for improvement remain in the supply chain. Ross admits that they have fallen behind their competitors in terms of technology and techniques on this front. One example is where inventory could be shipped directly to store instead of being sorted from a warehouse.
- Other opportunities for productivity improvements exist in-store, for example a mix of casual, part-time and full-time staff.
Whilst results from their turn-around are still pending, we were nonetheless happy with progress so far.
Please remember to consult your adviser and research thoroughly before buying or selling any listed securities.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Raza Rizwan
:
Hi Roger, nice article. Do you have any ideas what marketing strategies TRS could implement to drive sales?
Roger Montgomery
:
Yes, but as observers rather than shareholders it would be arrogant to suggest we know better than management
Guy Davis
:
Thanks for the info Scott.
The share price strength late last week was pleasant for shareholders, though it comes with an added level of pressure, as the market is now pricing the company with the expectation that the turnaround will bare fruit.
The next 6-24 months will be very interesting and these gains will likely prove temporary for long-term holders if earnings don’t now follow through on expectations. It is easy to forget that the result was still a large profit dive.
Perversely, the fact that there is currently a lot of inefficiency in the company could mean long-term upside IF Mr Sudano and his team drive improvement in these areas.
Andrew Legget
:
“A lot of opportunities for improvement remain in the supply chain.”
This seems to be a common trait with Australian retailers. Recently read an article regarding David Jones new south african owners who basically slammed the existing technology and internal accounting systems that were in place. I knew the technology at the checkout was bad but to hear the owner say that the method used to account for inventory etc was something he has not seen for over 20 years was telling.
As for the Reject Shop, i always think a business going back to basics is a good thing. Trying to be too clever just seems to get many in trouble. They should be the branded version of Aldi. That is what they are good at and what their niche is.
It is a model that is seen over many different industries and types of companies but the selling of high volume, low margin products to keep a sustainable amount of cashflow and revenue coming in whilst you wait for a good ad hoc return on the lower volume high margin products works. If they get back to this and keep it up then they should once again become the company they used to be.
All in all, good to hear that current management are really trying to iron out all the flaws rather than try to hide that anything is wrong. I like that type of management, now we just need a better performing company to go with it.
Roger Montgomery
:
Thanks for sharing those insights Andrew. Terrific.
Random Ash
:
From my personal experience – a lot of larger corporations see I.T. and technology as a nuisance cost rather than an enabler. David Jones (and Myer) reek of this attitude and as you mentioned, their store front registers have absolutely done some time.
Roger Montgomery
:
Nicely articulated Mr Ash.
rob barnett
:
Scott,
Great analysis. Can you please just remind me again what the TRS economic moat is? Are we investing for a long time or a good time?
Roger Montgomery
:
Fair to say that in the past someone has done a good job of eroding it. Can it be regained(?); arguably if it has been wrecked, there wasn’t one to begin with. Brand awareness is extremely high but not a valuable competitive advantage unless it produces high returns on incremental equity, sustainably.
John E
:
Thanks for sharing this Scott.
I assume TMF is still in wait mode in terms of investing back into TRS ?
To me, there does appear to be lots of moving parts at TRS and more time is required to see that sales and margins are heading in the right direction.
I guess a slowing economy may work for them if they can capture the budget conscious consumer (of which there will be more of).