Why the Reject Shop (ASX:TRS) share price is getting hammered

This discount retailer is doing it tough right now…

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The Reject Shop Ltd (ASX: TRS) share price has come under significant pressure today following the release of a trading update.

At the time of writing, the discount retailer’s shares are down 15% to $5.37.

What did Reject Shop announce?

Reject Shop began by reminding the market that in February it warned that its sales were being impacted in the second half due to the Brisbane, Perth and Victoria lockdowns, COVID-19 concerns in New South Wales, and changing State border restrictions.

It also noted that its stores in CBD locations and large shopping centres continued to be negatively impacted by reduced footfall and that it was facing ongoing challenges in the international supply chain. That latter was expected to result in increased costs during the second half.

What’s the latest?

Unfortunately, since that update, trading activity has continued to be challenging.

Management advised that its stores in CBD locations and large shopping centres, typically in metropolitan areas, continue to trade well below pre COVID-19 levels.

As a result, preliminary and unaudited comparable sales for the 48 weeks ended 30 May 2021 were down 1.4% compared to the comparable period in FY 2019. This comprises a 12% decline in comparable sales at CBD locations and large shopping centres and a 0.9% lift in the remainder of its portfolio.

In addition, the company continues to incur materially increased supply chain costs, particularly higher international shipping costs, as well as costs associated with holding inventory due to international shipping delays.

Guidance

Although the company is aiming to offset the above through a reduction in costs, it isn’t going to be enough to stop Reject Shop from reporting a second half loss.

As a result, management expects full year sales of between $776 million and $778 million and earnings before interest and tax (EBIT) of $8 million to $10 million.

While the latter is higher than FY 2020’s EBIT, it is down markedly from its first half EBIT of $23.3 million.

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James Mickleboro doesn’t own any shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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