Long-awaited 'redux' story proves best days aren't behind TRS
By focusing its attention more on enhancing its buying power and efficiencies of scale from its investment in both IT and distribution systems, and less on its deteriorating share price fortunes – which bounced from over $16 early 2014 to a low of $5.40 mid 2015 – The Reject Shop (ASX: TRS) has finally put paid to those who wrote the company off as having its best days behind it.
By slashing costs and luring shoppers back into stores, The Reject Shop has pulled off one of the fastest retail turnarounds in recent history, and reversed a three-year decline in earnings by posting net profits for the six months ended 31 December 2015, up 43% to $18.3 million.
Having beaten consensus forecasts of about $13 million and exceeded analysts' full-year forecasts of around $17 million, shares in the discount retailer soared more than 20% to $13.20 – its highest levels in more than two years.
The stock's fully franked dividend of 25 cents per share (CPS) was up 51% over the 16.5 cents paid in 1H FY15.
While the company has done a lot to squeeze incremental cost savings out of the business, it has also significantly lowered the cost of doing business by slashing the set-up costs of new stores (per new store) by a whopping 25%.
This means the company can reinvest more in driving top line sales growth.
On an equally pleasing note, the sales momentum experienced during the first half has continued into the first six weeks of the second half with managing director Ross Sudano advising that comparable store sales growth is continuing at a rate consistent with that in the second quarter (3.2%).
An additional five stores are expected to open in the second half of this financial year, although five will also be closed, with three of those due to redevelopments in the centres where they're located.
With The Reject Shop back on radar, it's worth becoming reacquainted with the quality of this stock's balance sheet.
While earnings per share (EPS) has been very poor over the last five years, the stock has an investment grade balance sheet, with long-term cash flow that remains strong relative to reported profit.
EPS is forecast to jump from $0.56 in 2016 to $0.67 in 2016, $0.80 in 2017, and $0.89 in 2017; and return on equity (ROE) is forecast to grow from 12.63% in 2015 to 16.14% in 2018.
With the share price again on upward trajectory, those looking for an attractive entry point should note that stock appears to be displaying all the hallmarks of a value-play.
However, what management now need to do is consummate the renewed faith the market has in the stock by proving that there's more to the stock's turnaround that cost-cutting.
Assuming it can, the 47% discount that the stock trades at to its intrinsic value can be expected to continue closing.
The reality that same-store sales were up 4.4%, while expenses plunged 32%, should not be lost on those who like 'The Reject Shop-redux' story.
Given that most of the sales growth came from the first quarter – partly because the second quarter is more competitive given the Christmas trade – investors should watch the next quarterly figures closely.
At face value, Australians' appear to be opening their wallets at the more value end of the buying chain.
But the next quarter results should give meaningful clues to whether the interim result was indeed 'stunning' or a result that will be hard to repeat.
With The Reject Shop trading at such a significant discount to its intrinsic value, the downside risk of buying into what appears to be a value-play look minimal.
The stock also looks attractively priced relative to 12 months price targets of around $5.70.