The Reject Shop reports $10.3m profit but expects headwinds

Discount variety store chain The Reject Shop (ASX: TRS) has surprised the market by reinstating dividends and planning a $ 10 million share buyback of up to 4.64 per cent of its issued share capital, supported by improved sales and profit figures.

The Reject Shop’s annual report shows a 3.9 per cent lift in FY23 revenue over the previous financial year to $819 million, with Net Profit After Tax (NPAT) increasing 30.4 per cent to $10.3 million. EBITDA saw a more modest increase of 1.8 per cent to $127.8 million.

The company released its FY23 results the same day it announced the appointment of Chief Financial Officer Clinton Cahn as Chief Executive Officer of the Group. Cahn will continue acting as CFO until a replacement is found.

Underlining the company’s growth is what it says is a consumer need for the discount variety sector during challenging economic times. Non-executive Chair Steven Fisher says, “The Reject Shop has an important role to play in helping Australians save money in a high cost of living environment.”

Gross Profit saw a slight decline in FY23 to 40.9 per cent of sales, compared to 41.4 per cent, which the company says was “driven by a number of factors, including the shift in sales mix towards low-priced consumables and higher domestic supply chain costs.”

The Reject Shop also opened 15 new stores and closed 4 stores during FY23, ending a national network of 380 stores, up from 369 at the end of FY22. It plans to open approximately 15 new stores and close 8-10 stores in the financial year ahead.

Despite the positive growth signals in FY23, The Reject Shop expects significant headwinds in FY24. As the Directors’ Report states, “The Australian retail sector continues to be in a state of flux due to challenging economic conditions. It is expected that economic conditions will remain challenging in the short to medium term. Australians are facing significant cost of living pressures driven by interest rate rises and broad-based consumer goods inflation.”

The company says it will focus on generating comparable store sales growth in FY24 with ongoing development of its product range to “meet customer needs and respond to changes in consumer discretionary spending”. It intends to support this strategy by improving its product offering on branded consumables and new general merchandise lines.

The Reject Shop also aims to grow its profit margin in FY24, noting that “like most Australian retailers, the Company is subject to a number of inflationary headwinds which are putting pressure on its cost base.”