The Reject Shop earnings dip by over $10m as cost of living bites

In this economy, saving a quick buck is a priority. That’s also the reason behind K-mart profits booming to over $600 million in the first half of FY24. Australians are casting around for low-priced goods that provide good value.

Why, then, did the discount retail chain The Reject Shop (ASX: TRS) have a sobering experience?

Providing a trading update for FY24, the Company noted that its sales growth in consumables categories has remained strong as customers continue to visit The Reject Shop for low-priced consumables that represent great value, particularly branded products. 

In general merchandise, its Easter and Mother’s Day events performed well, with the ongoing newness and differentiation in its Home range continuing to do well. 

But, with cost-of-living pressures remaining elevated, sales of more discretionary, commoditised general merchandise products have been softer.

Sales during the second half to date are up 4.1% on the prior corresponding period (PCP), and comparable store sales are up 3.3% on the PCP. FY24 is the first period during which the new merchandise strategy was implemented, and it has shown positive signs. 

Chief Executive Officer, Clinton Cahn, said, “Our customers continue to respond positively to our new and improved merchandise offering. We are focused on continuing to grow sales in FY25 by further refining our merchandise strategy and continuing to expand our store network.” 

It reported growth in customers and units per basket, noting that it drove comparable store sales growth during the second half. This represents a continuation of the positive sales momentum achieved during the first half, notwithstanding the challenging macro and retail trading environment. 

The growth during the second half was softened with its EBIT results. The Company expects full-year EBIT (pre-AASB-16) for FY24 to be between $4 million and $5.5 million. In H1 FY24, its EBIT (pre-AASB 16) stood at $19.4 million; in FY23, it was $13.3 million. Shareholders can thus anticipate a major decline in the upcoming final report.  

During the first half of FY24, The Reject Shop launched new stores. Its store expenses included the operating costs associated with opening and closing stores. These costs totalled approximately $1 million in H1 FY24 (compared to $700k million in the PCP). This includes the costs associated with opening seven new stores (compared to eight openings in the PCP), reopening one flood-affected store, and closing four stores (compared to one closure in the PCP). 

Cahn added, “Like many Australian retailers, The Reject Shop is currently facing a number of macro and inflationary pressures, including higher wages, domestic supply chain costs and shrinkage. As we prepare for FY25, my team and I are very focused on improving gross profit margin and managing the cost of doing business.” 

The Company has yet to provide an explanation for the significant EBIT drop.