The Reject Shop has fallen further since my previous post in
April 2014. Results for FY 14 showed sales up 15% to $711.5m and Stat NPAT down
25% to $14.5m. Results were poor considering 46 new stores were added. Revenues
increased as expected given the new stores and comp sales were down -0.45%.
Excluding irregular accounting items in FY 13 (insurance claim) and excluding
expensed items associated with new stores, NPAT for FY 14 is roughly in line
with FY 13.
Investment Thesis
In the past two years alone, TRS have opened 87 new stores.
The expansion in stores took place following the collapse of a competitor which
provided an opportunity for TRS to increase their presence and market share.
Store expansions provide the opportunity for TRS to grow their presence and
grow their top line, however it has required substantial capex and investment
in working capital. Additionally, the speed at which stores were opened looks
to have caused inventory issues causing margin erosion. Combined with a
difficult retail landscape, this has seen TRS perform poorly and the stock is
down around 67% from the peak in January 2014.
At current operating margins alone, TRS looks to be good
value. However as TRS moderate store expansions, capex and investments in
working capital will reduce. This will have positive implications on earnings
and free cash flow. TRS now need to turn their focus from expansion to
improving efficiency. There are numerous headwinds to achieving efficiency: a
higher Australian dollar, a difficult retail environment, high competition.
Even if TRS maintain the current depressed margins I believe the share price is
cheap enough to warrant investment. However should they succeed in increasing
their efficiency the upside is even greater.
Current Valuation based on FY14 Results
At current prices, TRS trades at a multiple of 11.9 PER. On
an underlying basis this equates to 8.9x after stripping out expensed items for
new stores and asset impairments. EV/EBITDA is 4.8 for FY 14. On these numbers,
to me TRS is trading way too cheap.
|
|
Valuation
Metrics
|
|
Share Price
|
$6.0
|
|
Shares Outstanding
|
28,844,648
|
|
Market Cap
|
$173,067,888
|
|
Cash
|
$7,675,000
|
|
Debt
|
$25,103,000
|
|
Enterprise Value
|
$190,495,888
|
|
Dividend Yield
|
5.7%
|
|
|
Valuation
Metrics (FY 14)
|
Valuation
Metrics (FY 15 E)
|
|
PER
|
11.9
|
8.3
|
|
Underlying PER
|
8.9
|
7.8
|
|
EV/EBITDA
|
4.8
|
4.1
|
|
ROE
|
12.1%
|
16.1%
|
