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Edge7
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I am an Australian value investor. I have gone to full time investing this year (2012) at age 36 and am passionate about helping other Aussie investors succeed. My website is www.edgeseven.com.au
My company:
Edge Seven Pty Ltd
My blog:
Edge Seven Value Investing
  • ASX: TRS - The Reject Shop Limited 0 comments
    Apr 11, 2013 9:04 PM

    Job Application Unsuccessful

    The Reject Shop Limited (ASX:TRS) operates in the discount variety retail sector in Australia serving a broad range of value-conscious consumers who are attracted to low price points, convenient shopping locations and the opportunity to purchase a bargain.

    The Reject Shop offer a wide variety of general consumer merchandise, with particular focus on: everyday needs - such as toiletries, cosmetics, homewares, personal care products, hardware, basic furniture, household cleaning products, kitchenware, confectionery and snack food; and lifestyle and seasonal merchandise - such as seasonal gifts, cards and wrapping, toys, leisure items and home decorations.

    The Reject Shop started with a single store in 1981 in Melbourne Victoria and has since grown to over 250 stores operating in New South Wales, Victoria, South Australia, Queensland, Western Australia and Tasmania. The company's stores are located in shopping centers and standalone sites within shopping precincts in metropolitan areas, major regional centers and smaller country towns.

    The Reject Shop listed on the Australian Stock Exchange in June 2004 and currently employ over 5000 people. The number of employees brings me to linking the title of this article with the plagiarism of a joke by Arj Barker, one of my favorite comedians. To paraphrase Arj's joke, "Imagine how bad you would feel about yourself if you couldn't even get a job at The Reject Shop".

    Does this business have a sustainable competitive advantage?

    1. The Reject Shop has a well-defined target market of consumers who are conscious of value, want to save money and enjoy a bargain. The nature of The Reject Shop's business is that they are relatively immune from periods of lower economic activity as tough times will see more consumers become interested in finding bargains from their stores.
    2. The Reject Shop enjoys brand awareness from over 90% of the community. This is helped by the majority of stores being located in convenient shopping locations.
    3. The Reject Shop has developed a significant barrier to entry. This can be seen by the difficulties seen by one of their main competitors Go-Lo in recent times. Go-Lo's parent company Retail Adventures went into administration in October 2012. It might seem easy to compete with The Reject Shop by simply opening a shop front and selling similar products cheaply. However, behind the shop front is a 250+ strong store network and what appears to be a very well run distribution centre giving The Reject Shop significant scale and cost advantages over would be competitors.
    4. The company presents that it will have 280 stores opened by June and it has a plan in place to have 400 stores nationwide in the longer term.

    What are the risks facing this business?

    One of the risks with the plans to open more than another 100 stores will be getting the right locations in targeted areas. Location, location, location will prove very important to The Reject Shop.

    And, a second risk will be the potential to deviate from the right product mix for their customers.

    Is it run by able and trustworthy management?

    The Reject Shop's management has run this business very well for a number of years. The company's operations were significantly affected in late 2010 as a result of the Queensland Floods. The floods were extremely disruptive as they forced the closure of the Ipswich Distribution Centre. The floods also damaged about 80% of the stock held in the distribution centre at the time and created a logistical nightmare for the company. This put a big strain on operating cash flow at the time and forced the company to take on debt and to restructure their distribution centre in order to mitigate against the risk of any future floods.

    Management has down a remarkable job since the impact of the floods. The strong cash flow the company generates has enabled The Reject Shop to not only pay back the debt quick smart, but they now sit on a significant cash balance in the vicinity of $20 million as of December 2012.

    Is it trading at a bargain price?

    In 2011, the share price was beaten up once the full extent of the damage of the floods was known. This created a situation where the share price was excellent value due to some very unfortunate and temporary circumstances.

    It is about this time of year that I start looking towards 2014 financial year valuations and The Reject Shop still has some legs based on my assessment.

    Rank2012 Actual ValuationToday's Share PriceMargin of Safety2013 Forecast Valuation2014 Forecast Valuation2015 Forecast Valuation
    Gold 1$13.93$16.30-6%$15.34$17.20$16.92

    *Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

    Below is a 12 month price chart for The Reject Shop showing a jump from what was a temporary setback.

    (click to enlarge)

    Summary

    In summary, The Reject Shop is an awesome business operating consistently profitably. The company has more growth ahead of it courtesy of new store openings, competitive advantages, astute management and a very strong balance sheet courtesy of the cash the business generates.

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