Why this ASX small-cap stock is an 'undervalued growth opportunity' for 2024: fundie

The ASX small-cap share has managed to increase profits and earnings despite difficult market conditions.

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ASX small-cap stock the Reject Shop Ltd (ASX: TRS) has already enjoyed a strong run in 2023.

Since the opening bell on 3 January, shares in the discount retailer are up 21%.

For some context, the All Ordinaries Index (ASX: XAO) is up a more modest 2% over this same period.

Now, here's why this leading fund manager believes there could be more outperformance ahead for this ASX small-cap stock.

ASX small-cap stock hitting the right consumer notes

Many Aussie retailers have seen sales slump this year as cash-strapped consumers, feeling the double blows of sticky inflation and high interest rates, cut back on their discretionary spending.

But, as indicated by the company's name, the Reject Shop has so far avoided that fate as it predominantly targets customers shopping for a discount. And with wage growth lagging inflation, that encompasses an ever-growing group of Aussies.

Michelle Lopez, the head of Australian equities at Pie Funds Management, says this makes this ASX small-cap stock "right for the times".

According to Lopez (courtesy of The Australian Financial Review):

The Reject Shop is one of the few ASX listed retailers to be reporting positive like-for-like sales growth. It's an undervalued, organic growth opportunity, right for the times. We see margin uplift potential. This should lead to strong organic earnings growth through 2024.

How has the Reject Shop been performing?

The Reject Shop reported its full-year FY 2023 results on 24 August.

Among the highlights, the ASX small-cap stock reported a 5.8% year-on-year increase in sales to $819 million. And earnings before interest and tax (EBIT) soared 35.7% from FY 2022 to reach $21 million.

This drove a 63.4% increase in net profit after tax (NPAT), which came in at $10 million.

The company also reported "impressive sales growth" in the first seven weeks of FY 2024.

On the day of the results announcement, the Reject Shop chair Steven Fisher said, "The company's balance sheet remains strong."

Fisher added:

I am pleased to announce that the company has reinstated the payment of dividends and intends to undertake a further on-market share buy-back of up to $10 million.

The ASX small-cap stock had a net cash position of $77 million at the end of FY 2023.

Motley Fool contributor Bernd Struben has no position in any of the stocks 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 Scott Phillips.

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