The Reject Shop Ltd (ASX: TRS) has been the subject of a whole lot of 'reject' jokes in the past 12 months as the market and media have reacted to poor performance, a plunging share price and changes to the management team.
Initial doubts look to have been allayed with yesterday's full-year results release but I suspect there could be further headwinds ahead for the company and shareholders. Here's what you need to know:
- Total sales rose 6.4% to $756.8m
- Net Profit After Tax (NPAT) down 1.9% to $14.2m
- Return to 'same store' (or 'Like-For-Like') sales growth in the second half of 2015, but down 0.8% for the year overall
- Costs rose slightly overall with store expenses as a percentage of sales up 0.4 points to 34.3% and admin costs rose but remained at 4.8% of sales
- Return to positive free cash flow, ended the year with a net cash position of $5.3m (up from net debt of $17.4m in 2014)
- Closed 9 underperforming and/or high-cost (rent) stores and opened 15 during the year
So What?
It was a better performance than many in the market expected and I'm not surprised to see that shares soared. In particular it was pleasing to see the business return to same-store sales growth in the latter half of the year.
Another key marker was a return to positive free cash flow, which I consider to be vital for a small, low-margin business like Reject Shop. Debt remains limited which helps contain risk.
Management provided some guidance for 2016, indicating that shareholders can expect to see improvement in profit margin, the cost of doing business, and net profits in the first half of 2016. Over a longer timeframe, the weak Australian dollar remains a strong headwind as Reject Shop's hedging program will become less effective as time goes by.
Now What?
Reject Shop's report indicates a business grappling with several challenges though the past 12 months have shown that there is still a place for discount retailers in the Australian market and the company's outlook has improved.
After yesterday's rise, Reject Shop now trades on a Price to Earnings (P/E) ratio of around 15, which looks a little expensive given that its outlook for growth is average in the years ahead. I will be looking to see that costs remain subdued and that same-store sales growth is sustainable, however with a strong balance sheet and its recent performance I am content to hold my Reject Shop shares for the medium term to see if the company can deliver on its strategy.
