Following an unexpectedly poor Christmas period, The Reject Shop (ASX: TRS) announced a 16% fall in first-half net profit to $16.9 million, down from $20 million in the prior corresponding period.
Sales for the first half were up 18% to $385 million, due largely to the opening of 33 new stores during the period. Despite trending positively for most of the half, comparable store sales were flat overall, with disappointing sales over the peak weeks leading into Christmas.
As previously announced, the company expects full year net profit to be between $17 million and $18 million. This is down from $19.5 million in the previous year.
Managing Director Chris Byrce said, "We have undertaken a thorough review of all areas of our business to determine the actions required to increase profitability. We have identified a range of initiatives aimed at providing more flexibility to react to current trading and hence become a more proactive business going forward".
The discount variety retailer has grown its network of stores to more than 300, with a target of 400 across Australia. The Reject Shop is known for low-margin products such as confectionery, health and beauty items and other consumables — a strategy that has historically proven successful. However, the recent transition into higher-margin products is proving difficult as the company is exposed more to discretionary consumer spending.
Foolish takeaway
The Reject Shop has a robust balance sheet, strong operating cash flows and significant growth in planned store openings which provide a strong foundation for future growth.
It has announced a range of initiatives aimed at improving profitability. If it can successfully execute on the announced initiatives, patient investors will be rewarded as the current share price has limited upside priced in.
