Reject Shop profits drop as Aussie dollar takes its toll

The Reject Shop has experienced a taste of the turbulent retail climate, with its net profit for the first half of the 2013-14 financial year down 15.9% to $16,877,000.

While sales were up by 17.7% from $327.5 million to $385.4 million compared to the same time last year, the retailer said profit was impacted due to “higher than planned markdowns and poor returns from some higher margin categories”.

It said this was despite achieving stronger sales in lower margin categories.

The discount retailer reported sales were flat overall, noting “disappointing sales over the peak weeks leading into Christmas”.

“This was particularly evident in stores in major shopping centres, which continue to drag down very good growth generally in other store locations,” it said.

Sales growth was driven by the opening of 33 new stores in the six month period, as well as growth from stores opened in the prior year. 

It noted that the cost of doing business as a percentage to sales increased slightly, with store wages, new store openings, occupancy costs and advertising up. It said this was due to the expansion of the new store network, with new store opening costs increasing from $1.4 million (with 17 new stores) last period to $3.6 million (with 33 new stores).

Normalised EBIT (earnings before interest and tax) was $28.32 million, up slightly from $27.94 million in the previous period.

The Reject Shop said it “remains conscious of the requirement to improve operating returns, after significant periods of investing in stores and infrastructure for the future”.

“The Company’s strategic approach to its store portfolio remains paramount to ensure the Company operates in long term viable locations.”

In the next six months it reports it could close four stores, subject to finalisation of negotiations with landlords. It has 12 new store openings scheduled for the second half.

The Reject Shop predicts full year NPAT inclusive of operating costs to be between $17 million and $18 million, compared to $19.5 million for the previous full year.

RetailOasis director Nerida Jenkins said the rockier than expected road for The Reject Shop in the first half reflected some tough competition in the value market, as well as the impact of the Australian dollar on the ability to source international goods at low prices.

“They have focused on store expansions over the past few years, which takes a lot of investment,” she says.

“They have also faced issues with the weaker Australian dollar when it comes to sourcing goods, as well as engaging in heavier discounting…even in the value sector,” she says.

Jenkins says this heavy discounting has impacted profits, as well as the influence of new players in the value goods sphere, such as Japanese retailer Daiso, which launched in Australia in 2013. Every item sold in Daiso costs $2.80.

Over the rest of the financial year, Jenkins says The Reject Shop will have to work hard behind the scenes on sourcing goods at low prices, despite the falling Australian dollar, and at the front end, resist the urge to heavily discount.

She says “we are looking at the tumultuous recovery of the retail sector”, but thinks consumers are gaining confidence so retailers should see an uptick.

“The last six months was very sluggish…in November and December there was a rebound.

“Everyone hopes for a bounce back…there was recently a 9% rebound in discretionary spending on apparel. This was in negative status for ages.”