MENU

A Reject, or a bargain business

The Reject Shop’s (ASX: TRS) share price shot up around 10% yesterday after the company reported impressive top-line sales growth for the 2012 financial year and announcing a special dividend. With the stock trading at a multi-year low as recently as mid-July, the question for Fools is – did we just miss a bargain opportunity?

While headline sales growth was impressive at 10%, on a comparable store basis, (this means adjusting for the change in the number of stores opened and closed) sales growth was less impressive at a mere 0.5%. In effect the company’s sales growth was due to the roll-out of new stores, not from organic growth at current stores. More concerning however, was the flat pro-forma net income, (which is adjusted for the 53-week year and insurance recoveries) which showed deterioration in the net income margin.

These results are on the back of a couple of tough years for the company. The dreadful flooding which occurred in Queensland in 2011 took its toll on The Reject Shop’s operations, with its Distribution Centre in Ipswich particularly affected. With insurance payouts nearly finalised, the business is now back on track and this major distraction for management should be behind them.

The key factor to consider is the continuing new store roll-out. With 18 new stores over the past year and a further 20 planned for 2013 (an 8.5% growth rate), The Reject Shop is expecting to have 256 stores by 30 June 2013. While the company is obviously not in the early stages of its store roll-out phase, it also does not appear to have reached maturity.

Many articles and commentators herald the death of retail and there is no doubt that many ‘bricks and mortar’ retailers such as David Jones (ASX: DJS) and Myer (ASX: MYR) are struggling to adapt to the online competition. However, there are other examples of businesses that are responding to the new buying habits of consumers. These include Kmart, a division of Wesfarmers (ASW: WES) which has undergone significant structural changes to position itself as the lowest cost option and niche women’s wear company Noni B (ASX: NBL) which is using high levels of customer service to differentiate itself and appeal to shoppers.

Foolish takeaway

History tells us that buying retailers during their roll-out phase can be a rewarding experience.

While not at an initial stage of rolling-out, the company store numbers are still growing at a solid clip. The Reject Shop sells bargain priced goods but with the share price now on a historical PE of 15x, investors need to determine if the sales growth will ultimately flow through to profits to decide if this company is a bargain buy.

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool contributor Tim McArthur owns shares in Myer and Noni B. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!