Australia | Aug 16 2007
By Chris Shaw
Despite four interest rate increases in the past year or so parts of the retail market continue to perform well, as evidenced by yesterday’s profit result from The Reject Shop (TRS).
The company posted a 35.8% increase in net profit to $12.3m on an 18.3% increase in sales to $280.5m, though Intersuisse notes the flat sales revenue and net profit per store results meant the increase in earnings is attributable primarily to the company’s ongoing store opening program.
This still leaves significant scope for growth in coming years as ABN Amro notes management’s plan is to double the number of stores over the next five years from the current 130, which is indicative of an aggressive store rollout program and should support solid earnings as history indicates the new stores quickly reach maturity in terms of sales and earnings.
Intersuisse expects FY08 will see another 20 shops open their doors, which supports its forecast for strong earnings growth in the year ahead. The broker expects earnings per share will increase from the 37.2c achieved in FY07 to 45.7c in FY08 and 53.2c in FY09, a performance it suggests is deserving of an Accumulate rating for the shares.
These estimates make the broker one of the more conservative in the marketplace, as for example ABN Amro expects earnings per share of 59.7c in FY08 and 72.2c in FY09, Credit Suisse is forecasting 59.5c and 75.4c respectively and Merrill Lynch is at 60.1c and 74.4c.
Supporting Credit Suisse’s estimates is the view the latest result shows the strategy of lifting operating margins through operating leverage is working, while there is some upside from a more aggressive approach to logistics and IT operations.
Following the result Credit Suisse is the only broker in the FNArena database to change its rating, upgrading the stock to Neutral from Underperform, while ABN amro, Macquarie and Merrill Lynch all view it as a Buy.
The average price target according to the database is $14.44, up slightly from prior to the result and well above the median price target according to Thomson One Analytics of $13.57.
Shares in The Reject Shop have not avoided today’s carnage and are lower, at 2.45pm trading down 70c at $11.50.