Why the Reject Shop Ltd share price lost 6% on today's results

The Reject Shop Ltd (ASX:TRS) share price fell 6% after the company released its annual results this morning.

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The Reject Shop Ltd (ASX: TRS) share price fell 6% to $4.15 after the company released its annual results this morning. Here's what you need to know:

  • Sales fell 0.7% to $794 million
  • Net profit after tax (NPAT) fell 28% to $12.3 million
  • Earnings per share down 28% to 42.8 cents per share
  • Dividends of 24 cents per share (44 cents previously)
  • Net cash of $2.6 million
  • Outlook for continued weak trading conditions with same store sales (SSS) down 3% in 2018 so far
  • Confident sales are improving and forecasting net profit after tax of $16m-$17m in the first half of FY18 (may be a typo; see below)

So what?

Well it was a weak year for Reject Shop as forecast, although the results came in a little better than I'd expected, with sales up 1.2% on a 52-week basis (last year was 53 weeks long). Still, profits were crunched as a small reduction in sales and an overall increase in costs squeezed the company's margins. Reject Shop earns tiny margins on its sales, so any minor change to costs or sales can have a big follow-through on profits. By cutting the dividend, management conserved cash, although the company still paid out virtually all its cash (after expenses) in dividends.

The company continues to invest in its supply functions, with a new sourcing office in Hong Kong as well as various other new systems that may result in lower supply and operating costs. Plus, the long-term target of 400 stores still stands, with 350 expected to be open following the end of 2018.

Now what?

The elephant in the room is Reject Shop's first half 2018 profit forecast:

""With the return to positive comparable sales growth planned for the half, the Company expects to report an NPAT in the range of $16 million-$17 million in the first half of FY2018."

Such a forecast looks very optimistic. Management states that this is due to a weak second half, which they expect to be unprofitable. Even so, I think that Reject Shop is well-run and likely undervalued given its earnings potential – I'm more inclined to be a buyer than a seller today.

Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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