An article published in The Australian this week has highlighted the potential bright future for the Reject Shop Ltd (ASX: TRS) share price. According to the article, the surging demand for discount retail could make the Reject Shop a 'recession-buster'.
How the Reject Shop could be a recession-buster
The article cited recent research from Morgan Stanley which highlights the dominant position the Reject Shop holds in Australia's 'dollar shop' industry. As a result of the retailer's strong position in the sector, analysts believe the Reject Shop share price could see it become a $3 billion company over the next decade.
Analysts cited the budget retail niche as being large and highly profitable in other global markets. And, as such, advised that the Reject Shop has been 'under-earning' in the Australian market. According to Morgan's analysis, its new management and a simplified strategy could see the Reject Shop parlay its current annual sales of $900 million into greater growth moving forward.
With traditional clothing and footwear retailers facing troubling times as a result of the coronavirus pandemic, shoppers could increasingly turn to budget retailers like the Reject Shop. Morgan analysts cited the large addressable market, strong unit economics and resilience amid the economic downturn as possible fuel for the Reject Shop's growth.
To support their thesis, Morgan also lifted its share price target for the Reject Shop to $10. Analysts expect the company's new management to improve the retailer's range, cut sourcing and staff costs and take advantage of rent cuts. The Reject Shop share price surged 13.9% on Monday following this positive outlook.
How has the Reject Shop share price been performing?
Prior to Monday's spike, I believe the Reject Shop share price has been largely flying under the radar over the last 3 months. Despite being sold off during the Febraury/March bear market, the company's share price has surged more than 220% from its low of $2.40 in late March. It reached a new, 52-week high of $8.50 yesterday before falling back to $7.81 in early trade today. The Reject Shop was also added to the All Ordinaries Index in the June rebalance .
In mid-March, the company released a market update informing investors it had seen a material increase in sales driven by customer concerns surrounding the pandemic. It reported that comparable sales surged 5.7% for the first 11 weeks of the second half of FY20.
Should you buy shares in the Reject Shop?
Given the distressed state of many traditional brick and mortar retailers, I think investors should exercise caution before buying in at today's Reject Shop share price. Although Morgan Stanley is renowned for quality analysis, it's important to take into account that the company's share price has already rallied hard since earlier in the year.
I think a more prudent strategy would be to wait until reporting season before making an investment decision. This would provide a more thorough indication of how the retailer is performing and what its strategy is for the future.
