Reject shop continues slide, but predicts uptick

Struggling discount retailer, The Reject Shop has booked another decrease in profits and earnings, with comparable sales declining in the first weeks of FY18, despite strength in the June-half.

Net-profit-after-tax decreased by 27.8 per cent to $12.3 million for the year ended 30 June, in line with guidance provided by the company in April.

Total revenue increased by 1.2 per cent on a 52-week year-on-year basis to $794 million on trading from six additional stores in the network opened during the year, but earnings earnings before interest and tax (EBIT) declined by 25 per cent to $18.6 million on a 1.6 per cent decline in comparable store sales.

Sales strengthened in the June-half, increasing by 2.5 per cent on a comparable store basis, but was overshadowed by weakness in the first half, driven by what CEO Ross Sudano said was “poor management” of merchandise.

Sudano said foot traffic had suffered as customers had reacted poorly to the frequency of inventory changes in stores, with an overhaul of merchandising in the second-half resulting in a reduction of new product flowing into stores and an improvement in the availability of key legacy lines.

Despite strength in May and June, sales have dipped back into negative in the first weeks of FY18, declining by 3 per cent on a comparable basis; however Sudano remains confident trading will pick up, outlining a $16 – 17 million NPAT guidance for 1H18.

“While this has been an extremely challenging time in the retail industry, our business has emerged through this period in better shape and well placed to deal with the impacts of the external factors that influence retail,” Sudano said.

“The financial performance for the year has been significantly impacted by the combined effects of weak consumer confidence and execution issues … we have implemented actions to address this, including better managing promotional activity and the frequency of change in store, reinvesting in our key everyday lines.

“We are confident that our continuing initiatives to improve sales, along with the positive effects expected from the promotional activities planned from September, will see the company return to positive comparable sales growth during the half, albeit at a low level,” he continued.

Continued weakness in Western Australia and poor trading in the ACT had a material impact on the result, as management invested in a range of cost saving programs, including demand forecasting and power management systems, as well as initiatives to streamline supply chain processes.

“Two years into the change program we are on we’ve made progress however sales growth remains our key opportunity as we come to the end of phase one and begin phase two we have made progress in understanding our customers and the development of a clear, customer focused merchandise strategy,” Sudano told investors on Wednesday morning.

Investors remain concerned about the outlook for The Reject Shop, with intensifying competition in Western and South Australia from Aldi and the prospective entry of Amazon standing to pile on the pressure for the struggling business.

But Sudano remains confident in the outlook for discount retailing in an Amazon Australia, noting that in overseas markets such as the US discounters have been performing well relative to other retail segments such as department stores.

“Competition has been a constant for us and yes Amazon represents one more competitor, albeit a very good competitor, but our analysis of markets like the UK, US and Canada shows there is a clear role for discounters, even with the rapid growth of Amazon those businesses have been able to continually grow year-on-year,” he explained.