• Aussie retailers have been battered by higher inflation
  • But one ASX company that’s been doing relatively well is The Reject Shop
  • Stockhead reached out to CEO, Clinton Cahn

 

Australian retail sales volumes have fallen for three consecutive quarters for the first time in 15 years, putting the industry under intense pressure.

The last time we saw three consecutive quarters of decline was in the Global Financial Crisis of 2008 – which gives us a concerning insight into the current economic climate.

Retailers are currently seeing less demand at a time when inflation and interest rates have curtailed the spending power of most households.

In the earnings season just completed, discretionary retail stocks on the ASX were pummelled as they reported slower top and bottom lines.

But as consumers become more price sensitive, there is one retailer that’s doing well … The Reject Shop (ASX:TRS).

The company’s share price has risen by 35% this year, and 43% in the past six months.

Almost everybody has shopped at the The Reject Shop before, a variety store concept that offers a wide selection of everyday needs at prices cheaper than others.

“We’re very focused on keeping our price point below what we call the ‘other guys’,” Reject Shop CEO, Clinton Cahn, told Stockhead.

Describing the current retail landscape, Cahn explains that we are at the stage of normalisation of customer behaviour as the country comes out of Covid.

“And the cost of living has increased materially. So over the last two years, we had to put our prices up more than we would ordinarily like to, because of increases in international shipping and other input costs.”

Cahn acknowledged that customers have become frugal in their buying decisions as a result.

“We don’t expect that our customer would necessarily be putting another Morning Fresh in their basket, so yes, we are seeing trade down activity on the consumable side.”

However he strongly believes that the discount variety sector tends to be quite defensive in a recession.

“You’re still going to need snacks for your kids’ lunchbox, you’re still going to need Dove soap, and you’re still gonna need Morning Fresh for your dishwashing tablet.

“And we are still generally the cheapest on those,” said Cahn.

 

Where’s the competition?

As for competition, there are naturally competitors on any given item says Cahn.

“We see customers do their supermarket shopping, and then they would bring their trolley through the Reject Shop to top up on items where they’re just cheaper than at the supermarket.”

“And when you think of home decor items, you can buy those at Kmart, IKEA or Bunnings – but what we try and do is differentiate our offering in terms of its taste level.

“We want to appeal to a core discount variety shopper, so our product has a bit of a different look and feel,” said Cahn.

Apart from those major retailers, competition also comes in the form of the mum and dad discount variety stores – those $2 shops on the shopping strips.

“So it’s a highly fragmented market, but I think we benefit from being the only national discount variety store. That’s our strength, and that’s why we’re focused on growing our network,” said Cahn.

 

What investors can look forward to from TRS

Cahn says that looking ahead, there are two main opportunities for The Reject Shop business.

The first is making more sales from the existing network by improving its product range, and the second is to increase the store count.

The company is targeting to open approximately 15 new stores in FY24, including seven stores in the first half.

“I think we should be doing more and we’re focused on trying to develop that pipeline a bit wider going forward. Not for this year, but for subsequent years,” said Cahn.

He added that the company is on a turnaround journey, and the biggest opportunity right now is to improve product range, which is currently ongoing.

“This half is going to be an important half in terms of us demonstrating what that means to our customer.”

Halloween and Christmas will be the next peak period, and Cahn expects that sales will be bigger than last year.

He also noted that the discount varieties concept has been a very successful model overseas, but it hasn’t quite caught up here yet in Australia.

“If we just focus on making sure we offer a range that resonates with our core customer, and continue on expanding our network, we will improve the profitability of our business.

“And I think that’s an exciting proposition for investors,” said Cahn.

 

The Reject Shop share price today:

 

 

Other small cap retail stocks on the ASX

Here’s a list of some of the smaller capped discretionary retailers on the ASX.

Wordpress Table Plugin

 

Kogan (ASX:KGN)

Kogan’s share price has surged in the second half of FY23 after announcing a return to positive Adjusted EBITDA in H2.

The company’s focus during the year has been on frugality and ‘relentless pursuit of continuous improvement, data-driven decisions, and tough negotiations’.

For the full year, Kogan delivered an NPAT loss of -$7.7 million, and Statutory NPAT of -$25.9 million.

“Having returned Kogan.com to sustained and increasing underlying profitability in the second half of FY23, we look to FY24 with confidence,” said CEO, Ruslan Kogan.

 

Shaver Shop (ASX:SSG)

In FY23, in-store sales at Shaver recovered strongly (up 18% or $26.5m) as shoppers returned to traditional bricks & mortar shopping, despite foot traffic remaining well below pre-pandemic levels.

The company says it has a deliberate strategy to balance volume growth and gross margin percentage to maximise gross profit dollars.

SSG also said it remains ‘fiercely competitive’ in its core men’s and women’s hair removal categories to protect its leading market position.

For the full year FY23, Shaver reported record sales of $224.5m, up 0.8% on pcp. Gross margin was a record 44.5%, and NPAT was $16.8m, up 0.8% on pcp.

 

Toys R Us ANZ (ASX:TOY)

TOY says it will invest its recent $3 million fundraise into opening a new 3,000sqm Toys’R’Us and Babies’R’Us experiential retail centre in Clayton, Victoria in 2024.

The new store is anticipated to be one of the largest toy & baby stores in Australia, forecast to deliver $7 million in annual trading, and contribute $1.3m in profit contribution to the company in its first full year of trading.

TOY will also leverage state-of-the-art autonomous mobile robot logistics to provide 3PL services to relevant e-commerce brands, and provide an anticipated $2 million income over the initial term.

 

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.

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