Australia | Feb 15 2007
By Chris Shaw
Discount retailer The Reject Shop (TRS) is proving itself to be a solid performer in its category, generating margins Austock Securities considers to be world class and a profit result in line with market expectations. Despite this, brokers have a more lukewarm than red hot attitude towards the stock as the solid growth prospects appear priced in at current levels.
The company reported a profit for the half year of $10.2m, Austock making the point there were few surprises in the result as the increase in like-for-like sales reflected a focus on everyday items that boosted foot traffic but also produced lower margins.
Credit Suisse suggests the main positive in the result was the meeting of expectations despite some difficulties associated with moving into a new distribution centre and some IT-related issues.
Adding in full year guidance from management has seen the broker lift its FY07 profit forecast 2.8% to $11.2m, which is slightly higher than Intersuisse’s forecast of $10.8m.
Credit Suisse’s attention is focused more on future years, as while earnings guidance for the full year was only slightly higher the new store rollout program is being accelerated, and this is where it sees upside in the company.
The broker now expects 20-25 new stores to be opened next year, Intersuisse factoring in an increase in total footprint to around 300 stores in coming years from 122 now. As Austock points out, with net cash on its balance sheet the company has the flexibility to achieve its expansion goals.
As a result earnings in future years are enjoying greater revisions, with Credit Suisse lifting its FY08 estimate by 10.5% to $13.7m. Intersuisse is at $12.1m and Macquarie has also lifted its forecast by around 4%.
There remains a mix of ratings on the stock, as Austock regards it as a Lighten at current price levels given the premium to its valuation of $8.50, but Macquarie suggests the long-term growth justifies a more positive outlook and so rates the stock as Outperform.
Credit Suisse and Intersuisse take the middle ground with Hold ratings, while the FNArena database shows an average price target of $10.00, up from $8.08 prior to the result. The median price target according to Thomson One Analytics is $7.30.
Shares in The Reject Shop have fallen slightly today, as at 3.00pm the stock was down 15c at $10.32.