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Reject Shop shares plummet as capital raising is announced

The Reject Shop Ltd (ASX: TRS) share price was plummeting this morning following the announcement of an equity raising alongside the discount retailer’s half-year results. The Reject Shop reported that the business has been successfully stabilised, with sales increasing. 

After trending lower by as much as 9.6% in early trade, Reject Shop shares have somewhat recovered to be down by 2.34% at the time of writing.

The Reject Shop’s results 

Sales of $435.7 million for the half-year were reported, up 0.7% on $432.7 million in sales generated in 1H19. Comparable store sales increased 0.5% for the period. Strong Christmas sales were reported (December comparable sales finished up 1.3% on the prior corresponding period) while poor performing stock purchased under previous management was divested. 

Earnings before interest and tax (EBIT) increased 3.9% to $16.1 million from $15.5 million in the prior corresponding period (pcp). Net profit after tax (NPAT) increased 5.3% to $11.1 million (pre-AASB 16). Once the AASB 16 change to lease accounting standards was applied, however, NPAT fell to $9.5 million, a decline from the $10.6 million in profits reported in 1H19. 

The decreased post-AASB 16 NPAT was impacted by an increase of $2.3 million in occupancy costs due to the change in lease accounting standards. The clearance of legacy inventory committed to by previous management and an increase in the level of shrinkage recorded by the business also contributed. 

Banking and capital raising 

As disclosed in last year’s annual report, Australian and New Zealand Banking Group (ASX: ANZ) requested The Reject Shop complete refinancing of its banking facilities with another lender, ideally by the end of April, but no later than the end of August.

The Reject Shop was able to agree new banking facilities with ANZ, however, the limit for the working capital facility has been reduced from $25 million to $10 million. 

This morning, The Reject Shop announced a $25 million equity raising via an entitlement offer available to Australian and New Zealand shareholders. The purpose of the capital raising is to facilitate new management’s strategic initiatives, allow working capital flexibility, and reduce reliance on banking facilities.

The 1 for 3.12 traditional non-renounceable entitlement offer comes at an offer price of $2.70 per share. This is a 21% discount to the price The Reject Shop shares were trading yesterday at market close. 

Outlook

Comparable sales for the first eight weeks of 2H20 sit at 2.3%, a pleasing result given the challenging retail environment and macroeconomic conditions during January and February. 

In response to coronavirus, The Reject Shop has contacted each of its suppliers based in China. No suppliers are based in Hubei province. Suppliers are progressively restarting their operations after the Luna New Year and Chinese government-mandated shutdown. At this stage, The Reject Shop believes it is too early to quantify any impact the coronavirus may have on its financial performance.

The company is working on a range of initiatives and efficiency opportunities. It is currently undertaking a supply chain review to identify opportunities to reduce components of its costs of doing business. It will continue to divest poor performing stock categories and reduce overall stock levels to improve the working capital position. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Kate O'Brien