The Reject Shop (TRS) is a discount variety retail company, targeting Australian consumers through low price points, bargain-purchasing and convenient shopping locations. As of 30 June 2012, TRS had 239 stores in Australia, with plans to open another 40 in FY13.

At these stores the company 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.

Consumer environment

The environment in which TRS and all retailers have been operating has been challenging to say the least, but there are signs that some of these challengers area abating.

The latest reading of the Westpac Consumer Sentiment survey showed the index rising 0.6%, to 100.6 - its third consecutive month above the 100 level.

A reading above 100 indicates that more consumers are optimistic about the economy than pessimistic. Unfortunately the increase in consumer confidence has not translated into an increase in retail sales, which declined 0.2% in the month of December.

Oddly enough the release of the poor retail sales saw the sector move higher, as the market took the view the numbers add to the likelihood of further cash rate cuts.

FY12 results

TRS's FY12 results were a big improvement on what was a disappointing FY11. The company grew its net profit by 35.6% on-year, to $21.9 million.

The addition of 18 new stores over the year helped sales climb 9.9%, to $555.3 million. An increase in 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.

We believe that the 2H12 momentum will continue into TRS's 1H13 results, which are scheduled to be released on 20 February 2013.

Outlook

TRS's FY12 results were impressive on several fronts. Besides from the strong store sales growth the group 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.

Another notable item in TRS's results was that gross margins rose from 38.9% in FY11, to 44.1% in FY12, likely a combination of a strong Aussie dollar and a reduction in shipping costs.

While retail sales numbers are an important indicator for the retail space, the substitute nature of TRS's products can appeal to cost-conscious consumers, thus giving the company the ability to grow its sales in a weak environment.

Overall we believe that the aforementioned healthy balance sheet, strong comparable sales growth and expansion of gross margin will continue to drive TRSs earnings and in turn push its share price higher in the near-term.

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Reject Shop (TRS) Stock To Watch is a post from: Australian Stock Report Share Tips

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