Discount retailer, The Reject Shop saw its shares hammered cruelly yesterday after it sprang a trading and profit downgrade on the market so early in the first half the current financial year.
The Reject Shop admitted it would miss its profit guidance blaming a tough consumer climate driven by slow wage growth.
And chairman, Bill Stevens later told shareholders that dividends could be problematic given the weak trading conditions, the low share price and the need to keep on financing store growth and the overall business.
The company is currently running a buyback, and that has been questioned by some investors.
The shares fell almost 42% to a day’s low (and 12 month low) of $2.50, before staggering a little higher to end at $2.73, down 38.9%.
Releasing its full-year results in August the chain said it believed it could achieve a net profit after tax of up to $17.7 million for the first half of the 2019 financial year.
Ahead of the company’s annual general meeting on yesterday, the company released a statement to the ASX saying profit would now likely only reach between $10 million to $11 million for the half.
The company said sales for the first fifteen weeks of 2019 had fallen by 2.4%, while guidance given in its 2018 financial results assumed a 1% growth in comparable or same-store sales.
“We understand and acknowledge this is extremely disappointing news for our shareholders. We are doing everything within our power to manage the business for profitable growth through this extremely challenging consumer environment, CEO Ross Sudano said in the statement.
“The continuing absence of real wage growth and increases in the cost of many basic expenses (including mortgage rates) ensures that competition for the discretionary spend of consumers remains high.”
“In addition, we have seen increased investment in promotional pricing across many retailers, particularly in the Fast-Moving Consumable Goods (FMCG) space, resulting in additional investment in our FMCG pricing to ensure our value proposition is not damaged.
“Despite the challenges with sales in the first 15 weeks, we continue to manage our inventory particularly well and expect to continue to do so over the remaining weeks of the financial year.
“We are entering our key selling period and have a strong seasonal program in place, with a compelling value offer for Christmas and many tactical activities in place to drive sales. Christmas plans are built on the successes from last year and the early trade of the Christmas merchandise has been positive,” he said.
Record low wage growth has concerned policymakers for some time and contributed to a tough environment for traditional retailers also battling stiff online competition.
But the likes of Kmart continue to do well in this environment (although rivals like Target and Big W are losing money) and Myer and David Jones continue to find it tough.
And TRS shareholders were warned that the dividend might be problematic, with chair, Bill Stevens telling the meeting:
“Inclusive of the payment of a Final Dividend for the 2018 year on Monday (of 11 cents a share), it is the intention of the Board that a Dividend payout ratio of 60% of PAT, will continue.”
“We believe this to be a reasonable basis of allowing balanced capital allocation to investment in the growth of the business, and returns to shareholders, Naturally, and notwithstanding today’s announcement of an expected lower profit; we expect to lift the absolute $ amounts with a return to higher profitability.
“We acknowledge that the current ‘low’ share price; and including the deterioration that has occurred since balance date and the August announcement, together with the availability of ‘franking credits’, has influenced many shareholders and commentators to question the propriety of the Board undertaking a share ‘buy-back’.
“The Board will continue to review Dividend payments having regard to profitability, as well as the capital management and funding of the Company’s ongoing and desired expansion of operations. This will continue to reference cash from operations and external debt facilities; as well as the level of retained earnings, and the balance of the franking credits which may be attached to Dividend Payments.
“The Board remain conscious of the funding requirements of the ongoing new and refurbishment programs for our stores, and the challenges of continuing to grow the profitability emanating from comparable store sales. At this time, the Board has no intention to implement a share buy-back program,” Mr. Stevens told the meeting.
In other words, the interim dividend might be a bit skinny, or not all.
