If you are a major retailer, it pays to be distinctive. McDonalds has the Golden Arches and Coca Cola its famous red and white branding. But "shopfront" distinctiveness is also useful, and can help drive perceptions of brand value and customer familiarity.
In the case of the Reject Shop Ltd (ASX: TRS) its neon red and yellow signage in suburban shopping strips, sub-regional and regional locations has become much more common across the country in the last 18 months. Unfortunately, this increased level of market penetration has also coincided with a period of lower same-store sales and profits. So are the factors that are weighing on returns temporary or permanent?
Multiple hits
The Reject Shop faced a number of headwinds in the last few trading periods. First of all, it drifted from its core everyday value proposition and tried to reach into the discount department store space that is fiercely contested by Big W and Kmart. This means that it did not serve its core value conscious demographic as effectively as in the past, which led to declining foot traffic in stores and lower sales.
In addition, management failed to invest in new strategies to connect with customers, relying on old style paper catalogues as the primary communication channel.
There were also some external factors that affected the company, with an unseasonably warm winter last year meaning that much of the cold weather stock went unsold, while a major competitor also went out of business. Normally, a competitor shutting its doors would be good news, but in this case, the competitor operated for an extended period in receivership and undertook "fire sales" to sell as much stock as possible at deep discounts which significantly eroded Reject Shop store sales in the same areas.
Turnaround story
Fortunately, many of those factors have since been addressed. There has been a management change, with a new focus on ranging and store layout to once again serve the core value conscious shopper. In addition, there is less sensitivity to weather trends, with inventory returning to staples and less discretionary items.
The company has also invested heavily in a smart social media strategy on Facebook, and to a lesser extent, Instagram. Combined, the social media pages boast close to 200,000 fans, with high engagement driven by competitions, suggestions on how to use the products in store and "first looks" at new products. All of these encourage repeat visits and more repeat purchases, at the same time as leveraging the existing social networks of fans who often tag their friends and family in posts to draw their attention to particular products.
Management also made the decision to double down on the store rollout strategy, and increased the pace of the store openings to fill the gaps left by the departure of its failed competitor. While this had the obvious effect of dragging on earnings in the short term, as new stores take time to become established, the benefits should begin to flow as the stores mature.
The right time to buy?
Picking the exact right moment to buy a turnaround stock is more art than science, and many have had their fingers burnt trying to do so. But the Reject Shop has weathered a range of one-off factors that have affected its profitability, and may be well placed to surprise the market on the upside when it reports.
