Well-known and fast growing The Reject Shop (ASX: TRS) released their 2013 results, showing an 11.2% revenue increase to $618 million, but net profit was down 11.26% from $21.9 million to $19.45 million. During the year, a record 41 new stores were added, bringing the total to 276 stores. Just back in 2009 there were only 30 stores at the time, so even during the GFC, the company kept growing.
According to IBISWorld, The Reject Shop now controls 7.6% of the Australian Houseware Retailing Industry, compared to IKEA's 7.5%, with 77.5% of the total industry held by smaller and private vendors. In addition, a major competitor, Retail Adventures, went into voluntary administration, which has allowed The Reject Shop to pick up extra stores, adding to its record store growth.
The company looks towards further market consolidation as a weak economy goes forward, putting pressure on small, single store vendors. The annual report states it has secured opening dates for 43 more stores in FY2014. This expansion has increased its administrative costs, almost tripling the expense for new stores from $1.3 million last year to $3.5 million. The temporary hit it took on net profit this year was partly due to this expense.
Comparable store sales were helped by the having their Ipswich distribution centre back online from October 2011 after flooding caused major damage. Underlying earnings before interest and tax also received a boost from the $2.87 million insurance claim received.
The report also notes that 24 of the 41 new stores were opened in the second half of the year, and were not able to recover totally the costs associated with opening before the 30 June balance date. Thus, we see extra expense in this year without full realisation of those stores' earning capability.
A final dividend of 13 cents per share fully franked was declared, bring the total FY dividend to 37 cps. This is a 50% payout ratio of the net profit after tax, an approximate rate that the company intends to maintain going forward.
One headwind it has is the falling exchange rate of the Aussie dollar. The company relies significantly on imported products, so with the lower exchange rate, it has to pay more for the same inventory. This will require the company to focus strongly on merchandise mix and pricing strategies to manage extra cost of goods.
Foolish takeaway
For growing companies, the very idea of investing for the future takes away from immediate bottom line profit. It is only when those new assets, equipment and facilities have a chance to generate profit that the real return on that investment shows itself.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
