The Reject Shop Ltd (ASX: TRS) share price shed almost half of its value between Friday and Monday following what was a very disappointing update from the company. The shares fell more than 47% during these two sessions, and has shed another 1.4% so far this morning.
Much to the disappointment of shareholders, the discount retail business announced that the challenging retail trading conditions that were flagged at its half-year results announcement had continued. It said these had resulted in a 'widening difference to the market's average consensus estimates of the expected annual result'.
What's happened?
When it announced its interim results in February this year, The Reject Shop announced a 4.4% decline in earnings off the back of a mere 2% increase in sales (driven by new store openings). It also said that the challenges experienced during the first half had continued into January and February.
On Friday, the group reported that there had been no recovery to date. In fact, all states had experienced negative comparable store growth during the third quarter (January to March) with particular difficulties coming from the Australian Capital Territory and Western Australia. Overall comparable sales were down approximately 4% for the half-year to date.
By way of comparison, electronics retailer JB Hi-Fi Limited (ASX: JBH) also provided a trading update last week, saying that comparable sales growth for the March quarter was 8.2% for its JB Hi-Fi business, and 1.2% for its 'The Good Guys' business.
Ultimately, The Reject Shop believes the latest trading conditions could result in a full-year net profit of just $12.5 million. That reflects the company's expectations of a second-half loss of $5 million after generating a $17.5 million first-half profit. It also doesn't expect to pay a dividend, further reinforcing the company's current struggles.
What's next?
Given the nature of the Reject Shop's products, the company is arguably somewhat shielded from the pending expansion of Amazon.com (NASDAQ: AMZN) into Australia. After all, the products it sells are already quite cheap, limiting the need for price-conscious consumers to go searching for cheaper alternatives online.
However, it is also competing with the likes of Kmart and Target, owned by Wesfarmers Ltd (ASX: WES), and Big W, owned by Woolworths Limited (ASX: WOW), which are competing aggressively on price (and have a much wider array of products).
One area that the Reject Shop will look to improve is its product mix and its focus on everyday value, which has been one of its specialties in the past. It will also continue to focus on cost efficiencies throughout the business in order to improve profitability.
Foolish Takeaway
The Reject Shop share price has been crushed over the past few sessions, which could make it a worthwhile addition to your watchlist. However, the company does have big issues that it needs to deal with, so it seems unlikely to be smooth sailing for those investors looking to buy today.
