I've been keeping my eye on discount retailer The Reject Shop Ltd (ASX: TRS) for years now. Back in early 2007 the share price soared through the $10 mark and then it kept on going all the way to $18.50 by late 2010.
Since reaching that all-time high, there have been three occasions to buy the stock for below $10 a share – briefly in 2011, briefly again in 2012 and right now. The share price has obviously had some ups-and-downs, however this time I'm close to pulling the 'buy trigger'.
Increasingly frugal, bargain-hunting consumers have been playing havoc with retailers in recent years. It's been making life tough for everyone from the $2 billion David Jones Limited (ASX: DJS) right down to the $15 million Noni B Limited (ASX: NBL). Even the discount stores such as Reject Shop haven't been immune and the renewed push into the space by a revitalised Kmart, owned by Wesfarmers Ltd (ASX: WES), has made things doubly tough.
Why now?
Despite the industry headwinds, Reject Shop is aggressively opening new stores to gain market share. It could turn out to be a very smart strategy. The company already has around 230 stores and plans to open many more. If and when consumer spending picks up, Reject Shop should be well positioned to benefit.
Attractive price
According to consensus data from Morningstar, the stock is trading on an FY 2015 forecast price-to-earnings ratio and fully franked dividend yield of 15.8x and 3.4% respectively. These metrics are actually below the results achieved in FY 2013, but with expectations of a much larger market share come FY 2016, there is significant upside potential. What's more the payout ratio is low which means for income-seeking investors there is plenty of scope for the dividend to be raised further in the future too.
