The Reject Shop: Where to next?
As I’m sure many of our readers are aware, The Reject Shop (ASX: TRS) announced yesterday a revised profit forecast for the financial year to June 2014 of $14.5 – $15.5 million, down around 15 per cent from the previous guidance of $17 – $18 million. The Reject Shop IS NOT a holding in The Montgomery Funds.
We viewed this result as not entirely unexpected as many of the underperforming items sold by the firm in the December 2013 half-year had continued to be sold in the current half-year (furniture, home wares and other higher priced items). More recently The Reject Shop has had trouble in its winter ranges, reportedly due to the extended warm weather since Autumn. The items in this range include varying types of heaters, fans and other items but again having fairly high ticket prices. Furniture is still a noticeable theme at The Reject Shop.
As value investors, we typically disregard variables such as the weather and very short-term economic conditions. A company with a competitive edge will have an offering attractive to consumers under most conditions. What may be occurring however is a degree of brand confusion (that we have spoken about previously on the blog – here) as the firm continues to add higher-priced items into its inventory portfolio. This is an issue if consumers had previously seen the firm as a place to buy super-cheap everyday items such as toothbrushes, toothpaste, deodorant, cleaning chemicals, lollies, stationery etc.
The firm’s shares closed last Friday at $9.15 and on Tuesday fell to a low of $7.95, closing at $8.05, down 12 per cent. The question now becomes, has The Reject Shop fallen to such a low price that it offers value investors an opportunity? The answer may lie in inventory composition and the degree to which The Reject Shop can trade profitably whilst still maintaining a low cost offering to consumers. While we remain on the side-lines, this is one we will watch carefully.
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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Jim
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A classic case of a business with little surrounding in the way of a moat. A commodity business if you like to be purchased at a price commensurate with it’s discounted ability to add margin.
Nick
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Thank you for the update Scott. This is just my opinion and certainly not financial advice. I don’t own TRS but did earlier this week and am happy to confess so. I believed the inventory issues had been dealt with and would impact profit less than they did. I’d be delighted to buy (or continue to hold) at $8/share if they returned NPAT of $22mln in the next 2 years. I’m not so sure it’s being addressed though and will be waiting for tangible improvements prior to re-assessing and potentially re-entering. I guess I paid a good sum of money for that lesson and will try to keep my crystal ball confined to the cupboard in future.
Based on current NPAT I get per store profitability around $50,000, a far cry from their recent average and less than half their best. Keeping in mind they fully account for expenses relating to new stores in the current year balance sheet it’s still not a great result. I get the feeling they tried to maintain profit through expansion rather than consolidate their current operations and this has hurt. I recall Roger mentioned margins on TRS hadn’t looked good for a while, and would be watching these closely. I also notice days inventory has increased as margins have declined suggesting to me stock may not be shifting from shop floors.
I visit my local TRS occasionally and there is still a decent number of customers (I counted around 20 in my few minutes at the store on a Thursday afternoon) but they appear to spend well less than $10 each. There was a wide age range present (school kids through to older adults) but the product mix remains odd e.g. I’d never buy a $30 anything from TRS but was happy to buy 3 rolls of sticky tape on my last visit for $2. What I think is also interesting is the amount of “likes” TRS gets on facebook – over 100k with the most popular age group 13-24years – granted it’s not market leading research but coupled with in-store visits suggests to me that the target market is looking to buy confectionary, stationary, fun but cheap toys (on a regular basis, seeking something new), and every-day household items. (K-mart for reference has 250k likes and its most popular age range is 25-34yrs people who are likely to spend a more on household goods like vacuums, toasters, crockery etc but might not do so at a perceived “discount retailer”). There were also a lot of staff in that last visit, about 5-6 for a small store. Maybe they were getting ready for Thursday night shopping, so perhaps appropriate although I’m not sure.
Certainly there is a good potential if management can get things right. A return to an average per store profit of $70-90,000 is quite possible and would yield a pleasing result (I get $22-28mln NPAT). A $120,000 profit per store would be sensational, although I think the business environment has systemically changed since those results were achieved and the smaller figures are much more realistic. Perhaps the current store roll out will prove a wise choice 2-3 years from now given the recent competitive changes they’ve had but I’d want to see some evidence of business related introspection.
jimitoshu
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Big-W and Kmart have effectively cornered TRS. Plus they have deeper pockets, brand value and better purchase power, dedicated chinese supply and not to mention superior cost effective logistics.
The Reject shop is also stuck with the wrong culture and motto that “More is More” + race down to the cheapest.
I would say that TRS needs to scrap their current identity and do something bold. They have good coverage in Westfield, an existing supply chain.
Theres are a lot of small Australian businesses that would benefit from a distribution such as the Reject shop. Beef jerky, hobby crafters, local inventions…etc
craig.cory.54
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They are in the market for a new boss as well so lot’s to happen when he’s on board. A known performer hopefully who can turn this boat around amid a growing sea of same-same competition. New stores rolling out should at least add in revenue missing from same store sales.
Andrew Legget
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i remember commenting a few years ago on a post regarding the rejecgt shop questioning its stock decisions (as well as to what they are advertising i believe on expensive TV commercials).
It sounds like these issues are still in place and one would have to ask when it is going to be corrected. I am not a TRS watcher so this may already be occuring. I fear for TRS that other businesses might be picking up the customers that TRS used to enjoy (aldi, chemist warehouse for example).
An interesting company to watch as to how this plays out. I do believe the brand has significant issues, and have for a bit which is why i have never added it to my preferred company list. It sounds like TRS need to rediscover their identity.
Roger Montgomery
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You definitely did Andrew. We’ll done by the way.