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.