Reject Shop share price: why the stock crashed on Friday

Covid impact

Discount retailer – the Reject Shop (ticker: TRS) – saw its share price crash over 10% after providing the market with a second half trading update.

The key takeaway: covid had impacted H2 sales and costs were higher.

The causes here was manifold, border restrictions and lockdowns have impacted foot traffic levels while the virus has also put a strain on international supply chains, driving up costs.

All of this has resulted in the company seeing a number of its key stores trading ‘well below pre COVID-19 levels’. As such, management noted that ‘unaudited comparable sales for the 48 weeks ended 30 May 2021 were down 1.4% compared to the comparable period in FY19.’

While on the face of it such a result isn’t too concerning, on a more granular level, covid-19 looks to have had an outsized impact on some of the Reject Shop’s key stores – namely its CBD and large shopping centre locations. These witnessed more pronounced declines than the company’s other locations.

Specifically, the company said comparable sales at these key locations had fallen 12%. This was offset by a comparable sales bump of 0.9% across the Reject Shop’s remaining store portfolio.

What does all this mean?

As a result of all this, the company said it now expected full-year sales to come it at between $776 million to $778 million and for earnings (EBIT) to come in at between $8 million to $10 million.

This is the first time the company has provided FY21 guidance and noted that current operating conditions remain unpredictable, particularly in light of Victoria's recent snap lockdown.

Looking back at the interim results, those expectations, if they play out, would imply a significant deceleration in sequential half-on-half growth for the company.

Illustrating that point, during the first-half of FY21 the Reject Shop booked total revenues of $434 million and earnings (EBIT) of $23.3 million, on a pre AASB basis.

All of this should come as little surprise to those who have read the company’s interim results however. At the time of that release management reminded the market:

'The Company typically generates a higher proportion of full-year sales in the first half and has reported EBITDA and EBIT losses in the second half over the past two financial years. The same is expected in 2H21.'

Reject Shop share price falls

Despite that forewarning, investors bid the Reject Shop share price significantly lower on Friday, with the stock down 11.08% or 70 cents by 11:14 PM, to trade at $5.62 per share.

At those price levels TRS has a market cap of ~$215 million and trades on a ~32x earnings multiple.

Markets aren’t imperfect pricing machines after all.

Other bits and pieces

Elsewhere, the company announced that Margaret Zebel has been appointed as an independent non-executive director of the Reject Shop's Board.

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