The Reject Shop Ltd (ASX: TRS) share price is down by 64% over the last year. The Reject Shop is one of Australia's most well-known retailers. It's also been one of the most volatile and disappointing stocks over the past decade.
The Reject Shop's model relies heavily on selling a lot of discounted items. A slight rise or fall in sales can have a big impact on profit and the share price.
The issues
General retailing is one of the most competitive areas of the Australian marketplace. Wesfarmers Limited's (ASX: WES) Target and Woolworths Limited's (ASX: WOW) Big W have shown how difficult it can be to grow revenue and profit.
Kmart is clearly wiping the floor with its competitors including The Reject Shop. When price is your main selling point you have to make sure you're the cheapest and get your message out there.
The Reject Shop managing director said himself that the business missed a trick by focusing on variety items rather than discounted staple items.
Online retailing is going to rise in prominence in the future, particularly with Amazon opening its Australian site soon.
The potential
Firstly, The Reject Shop shares are trading very cheaply. It's currently priced at 9x FY17's earnings, which is a very cheap price.
I think the clearest sign of potential is to be found overseas. Online shopping is much more advanced overseas, particularly in the USA. Many retail businesses and shopping centres are struggling and closing.
However, dollar stores and heavily discounted stores are doing well in the USA simply because the economics of the products make it not worthwhile for the cost of delivering to a customer's house. The Reject Shop can really tap into this part of the market as long as it has cheap products and customers know about it.
Foolish takeaway
The Reject Shop management expect to report net profit after tax (NPAT) in the range of $16 million to $17 million in the first half of FY18. If it achieves a good year of sales and profit, then The Reject Shop shares could perform strongly from here.
