The Reject Shock

Shares in discount variety retailer Reject Shop Ltd (ASX: TRS) were slammed down 23.5%, as the company shocked investors with news that same store sales over the vital Christmas period were flat.

Same store sales is a number that retailers provide, which excludes the performance of newly opened stores. Including all stores, the retailer says total first half sales to the end of December, were up 17.7% over the previous period to $385.5 million. 33 new stores were opened in the last six months.

Managing director Chris Bryce said in a statement to the ASX,

“…the overall result was below expectations…resulting from an unexpected poor December trading period, coupled with disappointing gross margin outcome.

As a result, the company is predicting net profit after tax to come in between $16.6 and $16.9 million, with full year net profit around $17 to $18 million. What is a major worry for The Reject Shop is the disappointing sales result from stores in major shopping centres, which the company says dragged down the “very good growth generally in other store locations.”

You would think that foot traffic past its shopping mall stores would have been fairly reasonable over the key Christmas shopping period, but that appears not to be the case.

Either that is going to be an issue for many Australian retailers this reporting season, or it could be a factor affecting just The Reject Shop. We’ll soon know as other retailers update the market in the next month or so. If other retailers report similarly flat same store sales, then we will know it’s the industry as a whole that is suffering.

If not, then it means The Reject Shop is losing market share to competitors such as variety stores including Wesfarmers’ (ASX: WES) K-Mart and Target, Woolworths’ (ASX: WOW) Big-W, department store retailers David Jones (ASX: DJS) and Myer Holdings (ASX: MYR), and other discount variety retailers. Consumers may well be rejecting The Reject Shop’s ‘cheap and cheerful’ range of products.

That would be a major issue for the company, as it was expecting big things when its main competitor, Retail Adventures went into administration in 2012.

Foolish takeaway

The Reject Shop’s shares have been marked down hard and may look tempting. But until other retailers report, we won’t know if the company’s malaise is widespread, and Foolish investors may want to watch this play out from the sidelines.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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