The Reject Shop Ltd (ASX: TRS) share price could get crushed following today's market update.
Reject Shop Share Price
What happened?
This morning, The Reject Shop delivered tough news to the market, stating that trading conditions since its half-year financial update have continued below expectations.
It said its marketing, product mix and a tough external environment have contributed to a 4% drop off in comparable store sales for the half-year to date, versus the same period last year.
Worse still, if current conditions continue the company expects to report a second-half loss of $5 million, which will reduce the full-year result to $12.5 million. That's enough for the company to say it is unlikely to pay a final dividend to shareholders.
The company said it remains fully compliant with its debt covenants.
"This is a disappointing development for our shareholders and an under-performance," Reject Shop CEO Ross Sudano said. "The extremely challenging external environment, as well as execution issues with our merchandising strategy, have combined to deliver a weak sales trend, outweighing the positive sales momentum achieved during December."
He said the underperformance is a combination of factors. However, the feedback from customers suggests that the company's attempt to broaden their range into fresh products, away from everyday bargains, has hurt its foot traffic.
"This reduced focus on our everyday value and bargains, and its impact on our in-store promotional program, has adversely affected our foot traffic," Sudano added. "Coupled with the challenging market environment, where customers are reducing their discretionary spend, our promotional activity has not generated the incremental foot traffic required to grow comparable sales."
He said the company has strategies in place to address the problems.
What now?
The Reject Shop is a speciality store for discount products. But it could find itself between a rock and a hard place with tough market conditions and discount stores like Kmart and Target — owned by Wesfarmers Ltd (ASX: WES) — and Big W — owned by Woolworths Limited (ASX: WOW) — being very aggressive on price.
The Reject Shop does not have pricing power over these heavyweights. The arrival of online giants may also be a big hit to the company's profit line.
However, it's not all bad news. Indeed, The Reject Shop has a place in many consumers' budgets. Therefore, if the company's share price continues to fall it may become compelling value. Until then, I have it on my watchlist.
