Keeping an eye on The Reject Shop
After a four-month search for the right candidate, The Reject Shop (ASX: TRS) has found a new CEO in Ross Sudano.
Mr Sudano has a strong resume: he was previously joint-CEO of camping and sporting retailer, Anaconda, and CEO of Little World Beverages before its sale to the brewer, Lion. He has also worked in senior roles at firms including Foodland Associated Limited, Coles and BP Australia.
Our interest lies in the direction the CEO will steer TRS, both in terms of its inventory composition and the expansion of store numbers. We believe that TRS could again be a potential investment in our funds if it is managed correctly, so allow me to elaborate…
The Reject Shop has been positioned as a value buyer’s store, where customers can make savings on a range of branded goods. This theme appeals to a particular demographic of consumers: lower-income earners, middle-class bargain-hunters, or those just after cheaper deals on everyday items.
When TRS has focused on their core lower-priced item offering: they’ve done well. When they’ve attempted to change their inventory composition to include more expensive items in the mix, there have been problems.
Just the other week, I took a tour of my local TRS store and saw higher-priced items littered throughout the store. The traditional low-ticket items were somewhat sidelined. It was soon after that visit, that the firm downgraded its profit forecast.
If inventory composition stacks up, the next factor to focus on is price. Without market-leading low prices, there is little reason to go there (apart from instances of locality or if you’re partial to their American foods section).
Coles (part of Wesfarmers Limited (ASX: WES)) and Woolworths Limited (ASX: WOW) are stepping up their game in lower-priced generic branded products, with terrific results. An interesting exercise is to look around when you’re shopping at how much shelf space is taken up by home brands compared to the amount taken up by more traditional branded goods. Also, take a look at your trolley as you leave – if it’s anything like mine, you’ll notice 60-70 per cent of your purchases being a Coles or Woolies brand; which is quite a share of wallet!
This is important, because if I’ve (for example) bought my coffee from Coles or Woolies, there’s no reason for me to go to The Reject Shop to shop for the same item. However, if I can save 30 per cent or more on my food bill by shopping at TRS, then that’s a different story.
This leads us to an interesting question: can TRS’s inventory prices go down? For this to happen (whilst maintaining profitability), either costs would need to fall or inventory turn would have to increase significantly.
TRS’s largest expenses are comprised of wages, rent and administration, which are all somewhat fixed. Inventory turn is a function of inventory composition and effective distribution, so this could be a possibility. Lower COGS could also work, as this is essentially TRS’s competitive advantage; it uses its network to source low-price branded products overseas for sale at higher (but still low) prices in Australia.
A key point of our research is to find the answer to these questions.
Mr Sudano noted in the announcement; “I am excited by the opportunities that I see to optimise and leverage off the significant recent expansion of The Reject Shop’s stores”.
We’ll have to wait and see what this means.
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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Darren Munn
:
While I agree with Scott’s points, Wayne has absolutely nailed why some of these Outlets fall down if not completely over…….over-time.
Shopping there stereotypes the PERSON
a PERSON who is forced to shop at these outlets due to financial hardship is hardly likely to associate that experience as a good time in their life.
Hence the customer retention rate is likely to be less than 10% per year, where as Coles & Woolies would currently enjoy 85%-95% given their enormous suite of businesses.
Wayne A
:
Sorry to be a naysayer Scott, and I’ll concede there is often a price at which almost anything is a ‘bargain’, but I think Mr Sudano has a battle on his hands.
I am familiar with a number of TRS outlets. They are frequently tired looking and virtually empty. While that might suggest good turnaround potential, I don’t think the problem has as much to do with the mix of stock as the format losing appeal. The demise of Crazy Clarks (again) is a case in point. The $2 shop and Reject Shop were a great idea in their time, and benefitted from a profitable rollout program relatively early in the evolution of these bargain type stores. But there is nothing in them now that isn’t being offered in the likes of Kmart for at least as cheap, with a greater feel of quality control, in a clean ordered environment that doesn’t make less affluent shoppers feel like second class citizens.
My wife used to shop at TRS on a regular basis. She hasn’t touched them for years now, and has no reason to. Is this really one of those high quality businesses with an enduring competitive advantage that Montgomery frequently refer to? If it once was, I doubt it is now.
Scott Shuttleworth
:
Hi Wayne
Thanks for your comment, it’s good to have a dialogue. In my own review of Kmart I’ve found there to be a fair degree of differentiation between the two however your experience may differ.