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Kalkine Daily 05/03/2015 + The Reject Shop

Mar 07, 2015

In today’s daily we have covered stock research on The Reject Shop (Expensive).








 

The S&P 500 was down by 9.43 points or 0.45% on Wednesday and closed at 2098.35 points. U.S. stocks were lower on Wednesday, putting indexes on track for a second straight day of declines after a recent rally, with healthcare stocks the only bright spot after a U.S. Supreme Court hearing and a cancer drug approval. Equities had surged in February and both the Dow and S&P hit record highs on Monday, when the Nasdaq surpassed the 5,000 level for the first time in 15 years. The markets are in a wait-and-see mode after hitting record highs.

The ADP National Employment Report showed private employers added 212,000 jobs in February, short of the 220,000 forecast, although January's reading was revised upward.  Readings on the services sector from Markit and the Institute for Supply Management both pointed to modest growth.  Abercombie & Fitch slumped 14.3 percent to $20.55 after the teen apparel retailer's quarterly profit fell by a third.  American Eagle Outfitters rose 7.3 percent to $15.90 after better-than-expected fourth quarter sales. 


Abercombie & Fitch.  Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was down  by 32.3 points or 0.54% on Wednesday and closed at 5901.6 points.  Woolworths continued its decline, down 1.6 per cent, dragging Wesfarmers down with it, down 0.9 per cent. Healthcare stocks, led higher by CSL, which climbed 0.4 per cent, and Ansell, which gained 3.1 per cent. Big industrials Amcor and Brambles were the biggest boosters to the ASX 200, climbing 1.3 per cent and 1.2 per cent, respectively.

Computershare shares are up 0.47 per cent at $12.81 after the company announced that it will spend up to $C33 million ($33.8 million) buying Valiant Trust Company assets from Canadian Western Bank. Telstra Corporation was also down, declining 0.9 per cent to $6.32. Rio Tintotraded ex-dividend, weighing heavily on the sharemarket. It lost 3.7 per cent to close at $62.40.BHP Billiton was down 0.7 per cent to $33.31 after the iron ore spot price dropped US59 to $US62.24 a tonne. Financial services firm FlexiGroup, famous for powering the five-years-interest-free offers of many retailers, has bought New Zealand IT provider Telecom Rentals for $NZ106 million 

 


Ansell Daily Chart (Source – Thomson Reuters)

 
Top Performers on the ASX 200 were :-

 


 

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The Reject Shop Video


 

Stock Of the Day  - The Reject Shop (Expensive)

The Reject Shop (TRS) reported its half year results to December 2014 entailing H1 sales of $402.2 million which is up 4.4% on previous corresponding period. The H1 comparable store sales were down 3.3%. The half year net profit after tax of $12.8 million was reported indicative of a weak result which is below the result for the previous corresponding period. The gross margin was reported to be consistent with prior period. A decline of 14.4% in EBITDA (after store opening costs) at $28.5 million on previous corresponding period was reported. EBIT of $19 million was below expectations. TRS conveyed that it has a strong operating cash-flow generation while the debt covenants have been securely met. Further, the strong balance sheet position is also reportedly attributed to TRS’ substantial interest cover. The Company declared interim fully franked dividend of 16.5 cents per share maintaining the dividend payout ratio of 60% of full year projected earnings.


Financial Snapshot (Source – Company Reports)

As per the Company, the result was in consensus with its January 2015 trading update. The sales growth was driven by 19 new store openings and growth from stores opened in prior year. The dip in comparable store sales during July and August, particularly, resulted from weak consumer sentiment, poor sales of winter product line and liquidation sales activity by retail adventures or discount superstores. Disruption from re-laying of all stores also played a role herein. The second quarter witnessed sales stability with better customer traffic.


Store Statistics (Source – Company Reports)

It is to be noted that the cost of doing business by revenue jumped to 37.5% in comparison to 35.9% witnessed in previous corresponding period in view of poor sales performance on fixed rent costs.

As per the outlook, the Company aims to maximize strengths of its business model and capitalize on growing relevance of discount shopper while leveraging the investment in stores. Focus on improving communication with existing customers and encouraging new customers to try TRS’ offer through a TV-based brand building campaign are other efforts the Company is continuously following. The Company also reported that about 110 stores are up for renewal in next two years. Further, TRS intends to recover store productivity through changes to labor and operating practices.


TRS Daily Chart (Source - Thomson Reuters)

There are risks relating to competition from Aldi & Kmart and gross margin worries while softness in AUD persists. We note that weaker AUD may serve as a bottleneck for gross margin improvement into CY15. At the same time, TRS is ~50% hedged into 1H16 which provides a time frame for fine-tuning pricing strategies. The focus on business improvement initiatives and other strategies enumerated by the new CEO looks good but remarks without any specific FY15 guidance suggests for moderate results in H2. The long-term sustainable competitive advantages, if any, look hazy with the business being an easy prey for replicability. TRS is also exposed to cyclical pattern of varied consumer sentiments and economic conditions.

Based on the foregoing, we believe that the stock is EXPENSIVE at the current price of $7.04.

 

 
 

Team Kalkine

Level 13  167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147


        
Note - You can also view this daily in the special reports section.

 


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