The Reject Shop: Playing the long game
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Former Senior Analyst
- Date posted:
- 20 August 2021, 1:30 PM
- Sectors Covered:
- Consumer Discretionary (Retail)
- FY21 result in line with recently downgraded guidance. -5% revenue growth converting to flat EBITDA and 110% growth at EBIT.
- Material working capital build impacts CF, net cash position falls to A$70m – still very comfortable.
- Lockdowns continue to impact CBD/large shopping centre stores. Rent reductions expected with material renewal profile, or stores will be closed in these locations.
- The Reject Shop (ASX:TRS) continues to execute on its material cost-out program, although A$5m of FY21 wins will be re-invested in FY22.
- We are playing the long game with TRS which will require patience. Sales intensity has proven elusive over the years, however cost efficiency progress is being made. Add rating; (login to view target price).
FY21 result – tough sales year offset by material cost efficiencies
TRS’ sales fell by 5% in FY21. The group’s GM (-66bp) was impacted by elevated supply chain/shipping costs (+A$9m of unbudgeted costs). Despite the sales deficit, TRS delivered on extracting targeted cost efficiencies with CODB -84bp yoy (A$22.5m of savings). The above combined underpinned a flat EBITDA outcome, while lower D&A saw EBIT increase 110%.
TRS exited FY21 in a A$70m net cash position, down from A$110m at 31-Dec, due to a material working capital build. Inventory, which increased by A$30m, is expected to remain elevated throughout 1H22 in anticipation of the key Christmas trading period and with global supply chain challenges.
Little in the way of outlook comments; some FY21 gains to be reinvested
As expected/normal practice, TRS did not provide a trading update or guidance. However, clearly trading continues to be impacted by rolling lockdowns – particularly in CBD/large shopping centre locations.
General outlook focus:
- Generating LFL sales growth in existing network (subject to ongoing COVID-19 disruptions);
- New store rollout in neighbourhood/strip locations
- Continuing to optimise the cost base.
Supply challenges remain and higher freight costs are expected to persist through FY22. FX will partially assist in offsetting this cost headwind.
Store rollout targets: TRS has guided to 20 new store openings in FY22 and 5 closures (of unprofitable/underperforming stores) – net 15 new stores.
Investment flagged: TRS will use A$5m of the A$22.5m of opex savings in FY21 to invest in technology, systems and growth preparation in FY22.
Upcoming renewals: 35 impacted stores are up for renewal in the coming 18 months and TRS remains is placed to extract reasonable reductions in the current climate. If attractive enough, TRS will likely keep most of these stores open (as long as they are EBIT positive under current sales deficits + new rental terms). If not, they will be closed and replaced by stores in more suitable/cheaper locations.
Forecast and valuation update
We lower our EPS forecasts by 11% in FY22F and 5% in FY23. We now forecast sales +3% (modest comp + 20 stores over the course of FY22), EBITDA +18% and NPAT +54%. Our DCF/PE valuation fell (from A$6.80).
We think TRS can resolve/offset current headwinds reasonably quickly, while the underlying cost reduction strategy is on track. We maintain an Add rating (login to view PT), but have some lingering concerns about the group’s ability to deliver positive sales momentum for sustained periods in the long term – it’s been elusive thus far.
COVID-19; operational efficiencies taking longer to realise; competition (regionally based discount variety chains; single owner-operator discount variety businesses; discount department stores; supermarkets and various e-comm participants); FX (lower AUD); inability to create relationships with large, multi-national brands.
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