Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

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.