5min read
PREVIOUS ARTICLE 18 Share Tips - 21 September NEXT ARTICLE Stock of the week

Company: The Reject Shop Ltd

ASX Code: TRS

Market Cap: $343.4m

Share Price: $13.30

Recommendation: Accumulate

 Over the last 6 months, investors have embarked on a mad shopping spree for shares in our leading retailers. While the broader market has rallied +45% off its March lows, retailers – of the likes of David Jones, JB Hi-Fi and Harvey Norman – have more than doubled on average. This surge can mostly be attributed to better than expected profitability during the economic downturn. Consumer spending may have been down but the capitulation many feared failed to materialise.

The Reject Shop is a prime example of cut-price retailing that has discovered “new-found success” as the economic downturn has had its effects. Operating in the discount variety sector, the company serves a broad range of value-conscious consumers who are attracted to low price points, convenient shopping locations and the opportunity to purchase a bargain. Stores offer a wide range of general consumer merchandise, with particular focus on everyday needs – such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food; and lifestyle and seasonal merchandise – such as seasonal gifts, cards and wrapping, toys, leisure items and home decorations.

The company started with a single store in 1981 in Melbourne, Victoria and has since grown to over 171 stores operating in New South Wales, Victoria, South Australia, Queensland, Western Australia and Tasmania. Until 2006 the Company operated a parallel chain “Everything Here $2”. During the period from 2000 to 2006 these stores were progressively replaced by the larger more profitable “The Reject Shop” stores that are in operation today.

From the single store operation, The Reject Shop has grown to become one of Australia’s pre-eminent discount retailers. Although ‘reject’ triggers negative connotations, the company’s products are anything but. Management have built a reputation for selling cheaper, quality goods particularly during these tough economic times. Demand has remained resilient and sales increases have been primarily fueled by the addition of new stores across Australia.

The company has an outstanding track record of earnings growth over the years and with large-scale plans for further store rollouts, these trends look set to continue. Furthermore, the company’s record of funding store expansions through operating cashflows will leave for ongoing “cleanliness” to the balance sheet.

Strong financial results are a reflection of management’s focus on staying close to the customer and being responsive to changes in customer trends. For instance, due to the wider economic turmoil, recent times have seen a noticeable shift to more basic day-to-day items such as food and cleaning goods which continue to see resilient sales momentum despite having lower margin characteristics. The company reported a 19% lift in sales and a 22% increase in profits for the 2009 financial year. Resilience during the downturn can also be attributed to ongoing organic growth and increasing market share. The value proposition for consumers has come into favour, as reflected by strong same store sales growth of 5.6%.

Similar to the SuperCheap Auto Group (SUL), growth prospects are strongly tied to new store rollouts which expand the revenue base at a healthy rate. At present, 171 stores are in operation, with 20 being added during the 2009 financial year. The goal is to reach approximately 400 stores across Australia which at current rates would take over a decade to achieve – TRS has plenty of growth before it if it intends to come anywhere near these lofty milestones and according to current demand, it will come close. At a time where the likes of CostCo and Aldi are also looking to steal market share in the everyday consumables space, The Reject Shop is continuing unabated in its successful infiltration of a multi-billion dollar industry.

The Reject Shop’s value proposition isn’t only limited to attracting more customers per store. In fact, through good times and bad, the company has increased earnings per share at an average annual compound rate of 27% over the last five years. Although trading on a current PE of 19, the ‘higher’ valuation is simply in line with industry peers such as David Jones (16), JB Hi-Fi (20), and Harvey Norman (20). Investors are unlikely to find the shares of these premium businesses in the clearance isle any time soon.

Given The Reject Shop’s store rollout pipeline, we expect a track record of outperformance to continue to shine through. Paying a handsome dividend yield of 4.4% and with earnings continuing on their upward trajectory, we are recommending our clients accumulate.

Joshua Terlich is an analyst at wise-owl.com. All views in this article are those of wise-owl.com, not of TheBull.com.au and do not constitute advice.  

 

Other articles in this week’s newsletter

The secret to trading forex

Six Gorilla stocks to buy for the upturn

18 Share Tips

How to buy shares for less than their current price

Stock of the week

Retail stock to accumulate

An Introduction to Oscillators

Top 10 CFD stocks for the week

Market data – NEW

More breaking news