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Why Reject Shop Ltd (ASX:TRS) shares crashed 44% lower today

Unfortunately for its shareholders, the Reject Shop Ltd (ASX: TRS) share price has had a dreadful start to the trading day.

In early trade the discount retailer’s shares have crashed as much as 44% lower to $2.50.

Why are Reject Shop’s shares crashing lower?

This morning Reject Shop released a trading update ahead of its annual general meeting which is being held this afternoon in Melbourne.

As you might have guessed from the share price reaction, the first 15 weeks of FY 2019 have not been easy for the retailer.

According to the release, the company had been targeting comparable store sales growth of ~1% for the first half of FY 2019. This target was given 7 weeks into the new financial year when comparable store sales were down 0.5% for the period.

But rather than get better, things have unfortunately got worse since the release of that update. Over the last 8 weeks comparable store sales have fallen 3.9% on the prior corresponding period.

This means that over the first 15 weeks of FY 2019, comparable store sales are down 2.4% compared to the prior corresponding period.

In light of this, management has reduced its first-half guidance for net profit after tax from $17.7 million down to between $10 million and $11 million.

The company’s managing director, Ross Sudano, appeared to be very disappointed with the way it has started the new financial year.

He said: “We understand and acknowledge this is extremely disappointing news for our shareholders. We are doing everything within our power to manage the business for profitable growth through this extremely challenging consumer environment.”

He blamed a lack of wage growth and increasing basic expenses for the rising competition for the discretionary spend of consumers.

But Mr Sudano remains optimistic on the company’s performance improving.

He said that: “We are entering our key selling period and have a strong seasonal program in place, with a compelling value offer for Christmas and many tactical activities in place to drive sales. Christmas plans are built on the successes from last year and the early trade of the Christmas merchandise has been positive.”

Clearly some shareholders aren’t as optimistic on things improving in the near term and have been hitting the sell button in a hurry today.

Should you buy the dip?

I would suggest that investors avoid Reject Shop’s shares despite their sizeable decline today. Although management did not mention Aldi, I suspect that its growing footprint in Australia is having a negative impact on its performance. And with the German discount giant looking to expand further, things could still get worse.

Because of this, I would suggest investors look elsewhere in the retail industry at shares such as Adairs Ltd (ASX: ADH) and Noni B Limited (ASX: NBL).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended The Reject Shop Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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