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Up-and-coming retailer is rated a “buy”

The Reject Shop (ASX: TRS), the rapidly expanding chain of discount stores, has just been rated a buy by UBS analysts.

As The Australian Financial Review has reported, “The broker told clients on Wednesday morning that The Reject Shop should boost its earnings per share by 19 per cent each year in each of the coming three years, driven by its store-roll out program.”

UBS expects rising like-for-like sales and margin expansion to also contribute to earnings growth, though much less significantly than new store openings. The Reject Shop currently has about 250 stores throughout Australia.

Here’s a further look at this company’s performance and potential.

A quick grower but what’s in store for the full year?

For the most recent half year, the company reported strong results, with sales rising nearly 12% over the previous corresponding period and net profits after tax rising over 20%. Same store sales grew 2%, and 17 new stores were opened.

The company did not provide guidance for the full year but did announce that, “The opening costs of the new stores in the second half will outweigh the profit contribution of these additional stores in this half; however they will provide a significantly higher store base to start FY2014.”

A counter-cyclical play

Looking out to the longer term, The Reject Shop could as much as double its store count over the next several years. The stores also may have additional appeal for bargain-hungry consumers in the event of a prolonged economic downturn, as discount retailers tend to be counter-cyclical successes during such times. Consider how, thus far this year, while the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has given back its gains amid below-trend GDP numbers and a falling Australian dollar, The Reject Shop has packed on 15%.

In terms of risks, competition from Kmart, owned by Wesfarmers (ASX: WES) should be a cause for concern. Both retailers sell low-cost home wares, accessories and packaged foods, and Kmart is a deft, well run operation.

Still, with shares of The Reject Shop currently trading for about 17 times trailing earnings, and on an EV to EBITDA basis of about 10, this fast grower and strong performer could be one for your watch list.

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Motley Fool contributor Catherine Baab-Muguira does not own shares in any company mentioned here.

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