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The Reject Shop Ltd: What happened and now what?

Reject Shop Ltd (ASX: TRS) led the local stock market down on Friday as investors absorbed the news that sales over the ever-important Christmas period were flat, which saw shares plunge $5.40 or 31.95%.

What happened?

The company announced a 17.7% increase in sales for the first half to December 2013 when compared to the prior corresponding period. Unfortunately, this figure does not take into account the 33 new stores that were opened in the period as part of the retailer’s rapid store expansion.

Instead, comparable store sales gives a more accurate reading of performance, which the company said was flat overall for the first half while sales were also disappointing over the pre-Christmas period. Management now expects net profit after tax (NPAT) for the first half to be somewhere between $16.6 million and $16.9 million, down from $20.1 million last year.

Higher than planned markdowns and poor returns from higher-margin categories also acted as a drag on the company’s performance.

Now what?

What is a particularly worrying sign for the retailer is the performance of its stores located in major shopping centres. The company said that these stores “continue to drag down very good growth generally in other store locations”.

Chris Bryce, the company’s managing director, said that foot traffic and competition from other businesses such as department stores were all placing pressure on store performances in major shopping centres, and while the existing leases for these malls will be honoured, they will each be closely examined as they approach expiration. Already, there are four stores that could potentially be closed this half, although twelve new stores will also be opened in regional centres.

While shares may have fallen nearly 32%, we could see them fall even further in the coming months. The Australian dollar, which is currently sitting at around US86.9c, is pegged to fall to US80c this year which will put significant pressure on the business and impact margins.

Foolish takeaway

The pain has been widespread for shareholders in the retail sector. Super Retail Group Ltd (ASX: SUL) finished last week at $10.50 after trading as high as $12.60 the week before (a decline of 16.7%), while department-store giants Myer Holdings Ltd (ASX: MYR) and David Jones Limited (ASX: DJS) declined 5.7% and 4.6% for the week respectively.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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