Reject Shop Ltd (ASX: TRS) is an ASX All Ordinaries, or All Ords, share that has done really well in 2023 to date. The discount retailer's share price has gone up by 37% in the past six months, as you can see in the chart below.
I'm going to talk about why I think it's still an opportunity.
The company recently reported its FY23 result, which I thought was impressive given the current economic environment. Let's check the numbers.
Earnings recap
Comparing FY23 against a 52-week FY22 period, sales grew by 5.8% to $819.3 million, earnings before interest and tax (EBIT) grew by 35.7% to $20.8 million, and net profit after tax (NPAT) increased by 63.4% to $10.3 million.
Reject Shop said that as cost of living pressures increased during FY23, customers have been moving towards low-priced consumables that "represent great value". In the FY23 half-year result, the company said it had reported its strongest Christmas trading period on record.
During the year, the business saw a reduction in international shipping rates, which peaked at the end of FY22 and have reduced significantly. The business is expecting a material boost in gross profit in FY24.
The Reject Shop managed to reduce its cost of doing business (CODB) percentage compared to sales to 36.8%, down from 38%. In FY23, it opened 15 new stores and closed four others. These new locations were predominately in neighbourhood and shopping strip locations.
The business said it's going to maintain a minimum dividend payout ratio of 60% of net profit. It declared an ordinary dividend per share of 6.5 cents and a special dividend of 9.5 cents.
Why I like Reject Shop shares
The ASX All Ords share has seen comparable store sales growth of 4.4% in the first seven weeks of FY24 and 6.4% year-over-year growth of total sales. Management believes customers are responding positively to saving money on branded everyday essential items. Indeed, growth in this environment is very appealing to me.
The business wants to keep providing customers with value, more special buys, improved newness, and greater variety in FY24. It's also looking to keep opening new stores.
The Reject Shop believes it can improve its profit margin in FY24 though inflation headwinds are increasing costs. Part of this will involve investing in its supply chain and technology which "minimise risk and enable efficiencies and growth".
It has a strong cash position, with net cash of $77.3 million at the end of FY23, with no drawn debt.
The ASX All Ords share is also conducting a share buyback of up to $10 million, which could end up purchasing more than 4% of the issued shares. That should be a value-boosting initiative for shareholders.
The estimates on Commsec look promising to me, with a forecast of 35 cents of earnings per share (EPS) and a dividend per share of 18.5 cents in FY24. That would put the current Reject Shop share price at 16 times FY24's estimated earnings and a grossed-up dividend yield of 4.7%. If the business can keep growing sales and profit, I think it has an attractive future.
