The Reject Shop Ltd (ASX:TRS) just might be my favourite retailer; a store where you can buy items for what they should cost, which is usually substantially cheaper than they cost at a supermarket or department store. A pack of 10 coat-hangers? $2. Bottle of Morning Fresh dishwashing liquid? $2. Two litre bottle of Schweppes/Pepsi brand softdrink? $1.85. You can also find bargains on everything from toiletries to chocolate to Christmas decorations.
The Reject Shop's share price has been looking a little sad lately, after earnings downgrades and poor retail conditions triggered a sell-off. Very little has changed in the underlying fundamentals of the business however, so here are three reasons to give The Reject Shop some love:
1) Discounts
The psychological appeal of being able to buy an essential item for a handful of small change is not to be underestimated. Anyone from the age of 18-80 (and older) will have a dozen 'I remember when you could buy ____ for only $x' stories. Well, you still can – thanks to The Reject Shop! Not to mention that tight financial times bring out the thrifty shopper in all of us.
The Reject Shop's discounter model also allows the company to benefit from 'economies of scale', where ordering more of an item makes each individual item cheaper thanks to savings on logistics, supplier discounts and so on. It's an idea already being used to savage effect by supermarket giants like Woolworths Limited (ASX:WOW), and as The Reject Shop increases its store numbers and completes a satellite logistics area in Perth, the benefits will only increase.
2) Parallel Importing
Australia is one of the most expensive countries on the planet, bar none. You can buy a 500ml bottle of water from a supermarket in Germany for the equivalent of five cents Australian. A Pepsi-branded softdrink might cost 20 cents AU.
The Reject Shop uses this to its advantage by importing legitimately manufactured goods from overseas suppliers for cheaper than they can be found domestically. This is why you will often see labels written in a foreign language in Reject Shop stores, and despite a weaker Australian dollar the company should continue to profit from its imports. Parallel importing combines well with point number one to make Reject Shop's earnings considerably more defensive than other consumer discretionary companies like Myer Holdings Ltd (ASX:MYR).
3) It's cheap!
Buying a share just because it's cheap is not a wise investing decision. But in the case of a business like The Reject Shop, which has a number of other advantages and a well-thought out approach to expansion, it just might be the final encouragement you need to make a purchase. Earnings look to be down roughly 30% from previous guidance, but the company has fallen over 50% and may even have further to go if investor faith in retail stocks stays shaky. If you're a believer in The Reject Shop's future, you could be buying a real bargain. If however you're a little wary of the retail sector at the moment, why not check out the The Motley Fool's Top Dividend Stock for 2014? It pays a grossed-up yield of 7% and boasts double digit profit growth – click here for your free report!
