Like Pacific Brands (PBG) on Tuesday, The Reject Shop (TRS) received a different reaction to yet another bout of poor news on its trading position at yesterday’s AGM with the shares rising 0.9% to $8.67.
Normally the reaction to bad news about sales or earnings has been a quick fire sell off – a bit like the experience of Pacific Brands as it has struggled with downgrades and write offs and losses in the past year.
But at its AGM on Tuesday news of a confirmation of a weak first half and below par full financial year performance saw the Reject Shop shares rise.
That was after the company told shareholders the first quarter had been rotten – top line sales up 2.7%, but same store or comparable store sales down a nasty 5.4%.
It was a continuation of the weak trading performance the company has been experiencing for much of 2014.
And yet investors bid the shares higher, instead of lower.
Perhaps it was the rise in the wider market for a second day which enabled investors to ignore was essentially a weak update from the retailer.
Or was it the market recognising that with a new CEO in charge in Ross Sudano, the company should be given some leeway to see what the new broom brings in terms of improved performance.
TRS YTD – Reject Shop still struggling for growth
The worse than expected fall in same store sales (the true measure of retail selling performance) followed a sharp deterioration in trading conditions in the last two weeks of August.
Same-store sales in the first six weeks of fiscal 2015 were down slightly, continuing the trend in the second half of 2014, when sales slipped 1.2%. But since the slide in August there’s been an improvement.
Mr Sudano, who took over the as CEO after the departure of Chris Bryce this year, said comparable store sales had improved “considerably” over the last five weeks, but were flat for the first two weeks of October.
Mr Sudano said new strategies aimed at addressing the decline in sales were starting to take effect.
He blamed the sharp drop in same-store sales on weak consumer sentiment and the after-effects of an unseasonably warm winter, which depressed demand for seasonal products offerings and forced the company and its rivals to slash prices to clear stock.
Mr Sudano said stock ‘fire sales’ during July and August by Reject Shop’s main rival, Discount Superstores – which collapsed mid year – had impacted the company’s sales.
Trading in Reject Shop stores was also disrupted by the “accelerated re-lay of all stores during a two-month period” starting in mid-July, Mr Sudano said.
That involves giving each store a new look, with new stock, shelving and other displays.
That was a conscious change in retailing strategy after a weak 2013-14 which saw a 26% slide in net profit to just $14.5 million, on a 15% rise in sales (thanks to the opening of 46 new stores in the financial year).
Reject is slowing that aggressive expansion which has seen 90 new stores opened in the past two years (almost half of which were owned by Discount Superstores which collapsed in July).
"As indicated, we will open 17 of the 20 stores scheduled for the year in the first half. This will result in a significantly lower level of opening costs for 2015 than the past two years, and – by opening most of them in the first half – it should allow the recovery of those costs in the year of opening", Chairman Bill Stevens told shareholders at the AGM.
He said the company believed it was well placed to heading into the major Christmas trading period. But also warned the company would be reviewing all costs to help meet the cost of a stepped up advertising campaign to help the new approach to retailer outlined at the time of the full year results.
"We are conscious of the costs associated with building our business, particularly in this retail market. However with our model and this market – we believe the opportunity exists to expand our customer base – via increased store growth coupled with increased brand awareness,” Mr Stevens said.
"To achieve this increase in brand awareness will require some increase in advertising costs in the short term, for significant future benefit. To compensate, all elements of our current cost structure will be reviewed; in order to find the funds that will be needed to support these new developments,” he warned.
That sounds like the company might be hard placed to avoid a weak first half result because of the higher ad costs. The re-laying of all stores cost $1.5 million, according to Mr Stevens’ speech yesterday, but that was on time and within budget, on top of the store opening costs being concentrated in the December half year. On top of that there’s the impact on earnings from the weak September sales quarter performance.
