The nightmare doesn't look to be over quite yet for Reject Shop Ltd (ASX: TRS) shareholders.
The downhill ride started in early 2014, when the company issued a trading update and shares subsequently declined from $17.50 each to under $10.
I and many other investors thought the company looked very appealing at its new price, but in hindsight we caught a falling knife; shares declined to $7.50 each over the course of 2014.
Following the removal of the company from the ASX200, large sales from major index-tracking funds saw the company plunge another 20% to just above $6.
Another trading update released on Friday has pushed shares further down – dropping them below $6 for the first time almost since they launched on the ASX.
Here are the highlights from Friday's release:
- First half (1H) sales to December 2014 were $402.2m, up 4.4% on the prior corresponding period (pcp)
- 1H same-store sales (stripping out the launch of new stores) declined 3.3% on pcp
- 1H reported Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) to be down 12.9-14.4% on pcp after the costs of new store openings
- Cash at bank of $11.8m, down from $14.8m previously
Management also opined that 'sales have stabilised and turnaround has commenced'.
It's also important to note that this is a trading update, not a first half results release so these figures may change (hence the % range in 1H reported EBITDA).
In my opinion investors now face a tough decision – should you sell The Reject Shop?
It's now been nearly twelve months since the initial upset and, as Warren Buffett famously said, 'turnarounds seldom turn'.
On the other hand, virtually every company goes through tough times sooner or later; even giants like Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES) have seen bad years in the past despite being two of Australia's favourite companies.
As a quick look at those companies will show, investors who sold during the tough times in 2008 booked huge losses and also missed the subsequent gains when the businesses improved.
It's not like The Reject Shop has been a poor performer either, with investors who have owned it since launch still having doubled their money before dividends – despite the 50% losses in 2014.
A one-year period is a very short time in investing, and not long enough to determine if a share could recover or not.
In fact with most of the damage now baked into the share price and a price to earnings ratio of around 8, The Reject Shop is actually starting to look like a value purchase.
Warren Buffett famously never trades in and out of his stocks as they rise and fall – neither should you.
