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Reject Shop Ltd (ASX:TRS) shares slugged on FY20 report

Reject Shop Ltd (ASX: TRS) shares were… well… rejected by ASX investors today after the company handed down its FY20 financial results.

At the time of writing, shares in The Reject Shop are down 15%.

Here are the highlights from TRS’s report:

  • Revenue was up 3.4% to $820.6 million
  • Comparable store sales (which cancels out the effect of new/closed stores) rose 3.5%
  • Underlying profit of $2.7 million, up from a loss of $16.9 million last year
  • No dividend was announced

Looking at sales through it 354 convenience stores, Reject Shop benefitted from Australians spending up on essential items (think: toilet paper, toiletries, pet care, etc.) in the build-up to social restrictions. This was paired with a decline in demand for more seasonal things like Easter eggs and related products, travel and party equipment.

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The Reject Shop said the essential products are typically lower margin than its usual mix of products, so the shift was evidenced by the 1.25% decline in the company’s gross profit margin — to 40.9%.

Cost-cutting, including a 12.5% reduction in the head office staff count, enabled the business to grow its EBITDA (earnings before interest, tax, depreciation and amortisation) by 30%. Chairman Steven Fisher said the new leadership team’s decisions are what helped the company return to profitability in FY20.

“The new leadership team has stabilised the business – the Company has returned to profitability, has significantly reduced its inventory and has a strong balance sheet.”

Adding, “There is still lots of work to do but we are well positioned to pursue our three-phase ‘fix, reset and grow’ turnaround strategy.”

Financials

The company did not receive any Jobkeeper benefits during the period, which is promising.

During FY20, The Reject Shop said it generated free cash flow of around $156 million, thanks to a sharp increase in net cash flows from operations (and accounting changes). However, to exclude the impact of changes to leases and depreciation against them, my calculation pins free cash flow around $61 million. This is impressive considering the company has a market capitalisation of $248 million.

The company had $92 million of cash in the bank at June 30th, lower inventories and no drawn debt. Combined with a leaner business model, this bodes well for further restructuring and growth initiatives.

So far in FY21, Reject Shop’s comparable sales are down 2.4%, or 0.5% lower outside of Victoria (where 23% of its stores are located). The impacts of Stage 4 Restrictions are taking a particular toll on stores located in shopping centres.

Is it cheap?

If management can continue to prove results from the “Fix” phase of their strategy, The Reject Shop shares might be very cheap, especially if the bargain hunters begin to run their ruler over it.

For me, The Reject Shop is not the type of company I need to own in my portfolio so I’m not rushing out to buy shares. However, the cost-outs and other operational moves are showing positive early signs, so I’ll be watching along closely to see how they execute.

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At the time of publishing, Owen does not have a financial or commercial interest in any of the companies mentioned.

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