This shop is no Reject

The Reject Shop (ASX: TRS) is a retailer whose shareholders have endured a rocky ride over the past few years. A flood  which  took  its  Ipswich, Queensland, warehouse  out  of  action  didn’t  help  either,  and  its  discount  department  store competitors  have  moved significantly downmarket (led by  Wesfarmers’ (ASX: WES) K-Mart chain), crowding the space The Reject Shop used to have for itself.

It’s also one of a few retailers that doesn’t have much to fear from online retailers. Most of The Rejects Shop’s products are less than $10 – buying an equivalent item online could see the price double when you add on postage, and then face other inconveniences, such as waiting for delivery. Why would anyone bother?

Heading in the right direction

In the six months to December 2012, The Reject Shop increased revenues by 12%, helped by the rollout of 17 new stores. An upswing in consumer sentiment saw same store sales increase by 4.2%, with management forecasting positive comparable store sales.

Although the second half is traditionally lower than the previous year, with a ramp up of new store openings, earnings in this second half should be strong. In 2012, full-year earnings per share were 84.1 cents, with the first half generating 63.5 cents of that. In 2013, half-year earnings per share were 77 cents, although full-year results could be impacted by higher expenses related to the costs of new store openings. The company will also incur costs associated with its supply chain, more staff, stock and fixtures.

Rapid rollout of new stores

Retail Adventures, which was the largest discount variety retailer in Australia and owner of the Go-Lo, Crazy Clark’s and ChickenFeed chains went into administration in October last year. The Reject Shop is taking full advantage of the stumble, speeding up the roll out of 40 stores in 2014, the same number it will rollout this year, compared to its normal 20 stores. As Retail (Mis)Adventures is forced to close its underperforming discount stores, The Reject Shop is stepping in, buying out Retail Adventures stores in some cases.

Approximately 50 new stores will be open in the 2013 calendar year, which will take its store count to over 300. And that’s the biggest challenge for management – coping with the massive rollout, hiring hundreds of new staff and getting the supply chain and systems right. If the company can cope, the next two years set The Reject Shop up well for the future – with long term plans to have a network of over 400 stores.

The company is also taking advantage of retail landlords more willing to negotiate with retailers, especially the likes of The Reject Shop, which is one of a few businesses looking to grow its store numbers. That means The Reject Shop can aggressively negotiate not just new stores, but existing stores’ rents.

Foolish takeaway

All up, that could see sales and earnings rocket in the next few years. The company’s direct competitors have fared poorly in an industry that is as much a logistics business as a retail operation, given the high cost of freight relative to the low prices of its goods. So far, The Reject Shop has been eating their lunch, and appears likely to increase its dominance in the discount retail sector.

In the 2014 financial year, The Reject Shop expects a modest increase in full year profit over 2013, as new stores hit their straps. And that’s what this company’s story is all about – it’s the medium to long-term, built on the back of the accelerated store rollout. Based on that, The Reject Shop is worth adding to your watchlist.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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