The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. The group has 239 stores in Australia, which includes the 18 new stores it added in FY12.

TRS offers a wide variety of general consumer merchandise, with a focus on everyday needs, such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food.

The company has two key advantages that many of its mid-to-upper market rivals don't – a strong AUD benefits earnings due to lower import costs, whilst the substitute nature of its products can appeal to cost-conscious consumers.

FY12 results

After a somewhat disappointing FY11, TRS got itself back on track in FY12. The company grew its net profit by 35.6% on-year, to $21.9 million. The addition of 18 new stores helped sales climb 9.9% over the year, to $555.3 million.

An increase in the amount of stores was not the only reason for the jump in sales; comparable store sales grew 0.5% over the year, with a 3.2% jump in the second half.

The group's balance sheet is also in a healthy position. TRS was able to reduce its debt by $16.9 million in FY12, while increasing free cash flow from $1 million in FY11 to $25.2 million in FY12.

A strong Aussie dollar combined with a reduction in shipping costs saw the company's gross margin rise from 38.9% in FY11, to 44.1% in FY12.

Consumer environment

Australian retailers have been operating in an extremely challenging consumer environment, but we could be seeing a return to better conditions.

Last week saw the release of the Westpac Consumer Sentiment survey, which showed the consumer sentiment index rising 5.2% to 104.3. It is the highest level the index has been at in 19-months, and the first time over 100 in nine months. A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic.

The main reason for the uplift in the consumer confidence is likely the recent series of rate cuts, and yesterday's release of the RBA's minutes from the October meeting did flag the possibility of further interest rates cuts in the coming period, which in turn could see a further increase in confidence.

Outlook

TRS's FY12 results were impressive on several fronts. The group was able to grow sales on a comparable basis, improve its margins, increase its free cash flow, record a huge jump in profit, all while paying back $16.9 million in debt.

The recent pickup in consumer confidence could not have come at a more perfect time, with the busy Christmas season just around the corner. Whilst the company declined to provide any specific guidance for FY13, we feel that with the addition of 17 new stores before Christmas, strong sales growth is all but assured.

Overall we see continued growth for TRS, which should hopefully translate to further share price appreciation.

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The Reject Shop Limited (TRS) Solid Growth is a post from: Australian Stock Report Share Tips

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