In-store theft rises as The Reject Shop cites the impact of shrinkage on margins

At a time when about half of younger Aussies are spending over 50% of their income on rent, the affordability crisis is magnified. It’s no wonder then that discount store chains like The Reject Shop (ASX: TRS) are gaining consumers’ favour. 

The Reject Shop is a merchandise-led business that collects cancelled orders, overproduced products and more, and sells them with a cheaper price tag. It allows everyday Aussies to save money on branded essential items. 

In light of the ongoing cost pressures, in the first half of FY24, the Company’s sales increased by 4.2% to $458.3 million. At the same time, earnings fell by 11.8% to $23.7 million and NPAT declined by 11.1% to $14.5 million as TRS slashed its prices further. 

The Chair of The Reject Shop, Steven Fisher, said, “The Reject Shop’s new merchandise strategy is beginning to resonate well with customers as demonstrated by the achievement of solid sales growth in a challenging macro and retail trading environment. Pleasingly, the Christmas and Halloween events performed well and sales growth momentum has continued through January and the first half of February.” 

Sales growth was good in consumables categories, driven by sustained demand for low-priced branded products amid ongoing cost of living pressures. This demand trend is expected to persist throughout FY24 and into FY25.

Fisher added, “Like many Australian retailers, The Reject Shop is facing some near-term margin pressure from higher shrinkage and rising costs. The Company is well placed to navigate these challenges with its strong balance sheet, which comprises over $80 million of cash and no drawn debt. Today we have also announced an interim dividend of 10.0 cents per share and the continuation of the on-market share buy-back.”

General merchandise sales experienced a decline compared to the previous corresponding period primarily due to planned reductions in average selling prices. However, this decrease was mitigated by growth in unit volume. 

To address the challenging economic climate, there was a concerted effort to lower average selling prices on seasonal products, aiming to make them more accessible to a broader segment of the Australian population.

The gross profit for the period was $185.1 million, up 3.6% from the previous corresponding period (pcp), with a gross margin percentage of 40.4%, similar to the pcp when excluding non-recurring income. However, this fell short of expectations due to higher shrinkage rates and a shift in product mix towards lower-margin consumables. 

Inflationary pressures have affected the cost of doing business (CODB), which stood at 34.8% of sales, in line with expectations. Store expenses increased to 30.3% of sales, while administrative expenses improved to 4.5% of sales. Store labour costs increased to 14.0% of sales compared to the PCP.

Throughout the period, the Company inaugurated seven fresh outlets. It aims to unveil around eight additional stores in the latter half of the year. Concurrently, four stores were shuttered during the period, with plans to close an additional four in the upcoming half. Furthermore, two store relocations are anticipated during this period.

Chief Executive Officer, Clinton Cahn, said, “Our customers continue to respond positively to our new and improved merchandise offering. I am pleased to share that, during the first half, the Company generated over 1.2 million more customer transactions than it did in the prior corresponding period, reported record first-half sales and recorded positive comparable store sales growth in a challenging economic and trading environment.”

At the end of the half, The Reject Shop’s national store network included 383 stores, up from 376 at the end of December 2022. Besides that, the Company appointed Lauren Harris as Company Secretary, replacing Michael Freier who resigned in October.