Another weak report yesterday from discount general merchandise retailer The Reject Shop (TRS) saw its interim dividend cut after a 24% plunge in net profit.
But despite the bad news, the shares jumped more than 14.8% to $6.20 at the close yesterday, in relief the news wasn’t worse after a downgrade was issued in January.
In that statement, chairman Bill Stevens warned that earnings before interest, tax, depreciation and amortisation (EBITDA) was expected drop by between 13% and 14% – to between $28.5 million and $29 million and net profit by as much as 25% to between $12.7 million and $13 million.
That’s what was reported yesterday and up went the shares in relief, helped also by improving sales growth.
The retailer blamed soft sales in July and August and the cost of revamping its entire store network for the 24% slide in profit to $12.82 million for the six months to December.
TRS 1Y – Reject Shop shares rebound
While the weak start to the period was well known (the company mentioned it in the full year profit announcement last August), what wasn’t known were the problems with the cost of the revamp (which involved relaying each and every store in the chain to change the look and make them more attractive).
While top-line sales for the six months ending December rose 4.% to $402.2 million (thanks to 19 new stores), same-store sales, the key retail sales measure, fell 3.3%.
And that saw the company’s cost of doing business rise from 36.3% of sales to 37.8% (or 37.8c in every dollar of sales). The costs of relaying the stores in the chain also played a part.
That in turn crimped profit margins and saw a 14.3% slide in earnings before interest, tax, depreciation and amortisation (EBITDA) to $28.5 million.
The Reject Shop said the deterioration in same-store sales had slowed in the December quarter to -1.7% against the 4.5% slump in the three months to September.
And the company said the improved momentum continued into the current half, with same-store sales turning positive in the first six weeks – which was another reason for yesterday’s relief.
The Reject Shop cut its interim dividend to 16.5c a share, a fall of 23% from the 21.5c paid for the first half of 2013-14. Will the final 8.5c a share for the previous year be under pressure if the company can’t generate higher sales and profit growth in the current half year?
