It was quite a reaction from investors yesterday to the update from The Reject Shop which confirmed that the company would have a terrible second half result, thanks to the Brisbane area floods.
The discount retailer’s shares jumped 10.6% or $1.13 to $11.73 after the company’s update which did confirm that it had not been crippled or hurt so badly that it was in danger of failing or being taken over.
The update saw shares in Myer rise 3.6% to $2.89 and David Jones rise 2.3% to $4.35. Shares in Woolworths and Wesfarmers (owner of Coles and Bunnings), both fell.
Some market rumours had The Reject Shop (TRS) suffering so badly from the floods, which badly damaged a new big distribution centre at Ipswich, west of Brisbane that its future was in doubt.
In fact there were stories around some corners of the market last month that TRS was on the edge.
Yesterday’s statement told the market that it had survived this devastating blow and was now looking to the future.
But after a first half net profit of $15.9 million, the company reckons full year earnings will be between $16 and $17 million.
If effect the second half profit will be around $1 million, against a previous estimate of up to $7 million.
Symbolically, after the update was released, came a substantial shareholding notice from Perpetual which showed that in the past month they had boosted their stake in TRS to 6.49% from 5.30%, an increase of 310,000 shares.
That’s a real vote of confidence in the retailer from the best value investor in the market.
"Given the ongoing insurance recovery process is unlikely to be concluded for a number of months, the overall profit for the half and therefore the year is largely dependent on recovering, via insurance, lost sales and gross profits, which at this point cannot be fully determined," the company said in its update.
"Despite the uncertainty over the finalisation of insurance recoveries, the Company now expects it is unlikely to recover all the financial impacts of the flood.
"Accordingly, the NPAT for FY2011 is now expected to be between $16m and $17m, against guidance provided prior to the flood of between $21m and $22m.
In yesterday’s statement the company said that following the closure of the Ipswich DC, "trading has been significantly impacted by the combined effects of the initial loss of inventory and the inability to ensure required inventory is being sent to stores in a timely fashion and in sufficient quantity.
"Consequently sales have not met targeted levels for the second half of FY2011, with negative comparable stores sales growth for the half to date.
“The sales performance does not accurately reflect the potential trading performance of the business given the significant amount of inventory lost in the flood, and which understandably took time to replace.
"The ongoing DC capacity constraints made the task of getting back in stock even more challenging.
"Nonetheless, we are pleased with the improved overall in-stock position across our store network, when compared to the initial post flood period.
"This has led to gradually improving sales trends; however, servicing store needs remains challenging and will remain so through to the re-opening of the Ipswich DC”.
"Given that the re-opening of the Ipswich DC is not scheduled until early next financial year (FY2012), the insurance recovery process will continue until the business is operating at full capacity.
"The Company’s existing insurance cover for losses arising from the closure of the facility extends into next financial year for a period up to 12 months from the DC closure for loss of gross profits and for up to 18 months to cover additional costs of working.
"The Company has received insurance payments totalling $12m covering a combination of lost inventory, asset replacement and some recovery of necessary additional costs currently being incurred.
"These payments broadly equate to cash outflows to date as a result of the closure.
"Ongoing claims under the insurance cover are being made on a progressive basis, with any amounts unpaid recorded as an insurance receivable.
"The Company expects that the total insurance claims and recoveries will be significantly higher than amounts received to date.
"Additional recoveries will encompass further reimbursement for asset replacement, continuing additional costs of working and final determination of lost sales and gross profit.
"An estimate of amounts outstanding, which the Company believes to be virtually certain to be recovered under insurance, will be recorded as a receivable at year end and will be reflected in the FY2011 accounts.
Looking to the future, the company was confident its expansion plans would not be disrupted.
"The closure of the Ipswich DC has not limited the Company’s future store opening program with 15 new stores already confirmed for FY2012.
Mr. Bryce said: “The loss of the Ipswich DC has impacted the business in the short term and provided the Company with numerous challenges.
"We expect retail conditions to remain challenging, and while there will be some ongoing operational impacts continuing into next financial year, we believe we should be operating at full capacity prior to the peak seasonal period.
"Despite current retail conditions and some progress on planned strategic initiatives being deferred, the business remains strong and
