MARKETS SPECTATOR: Accept or Reject?

The Reject Shop plans to sell $10 million of stock to individual investors and there are several reasons the price looks attractive.

Few stocks have attracted such a fund manager following as discount retailer The Reject Shop. The company sold $30 million of shares to institutional investors at $16.20 a share. On Wednesday, April 24, the day after the share sale, the stock surged $1.30, or 7.8 per cent, to $18.02. Next week, individual investors will receive documents from the company that will enable them to each buy up to $15,000 of Reject Shop stock at the same price institutional shares could buy the shares. 

The Reject Shop wants to use the processed of the share sale, $40 million in total, to open new stores throughout Australia and slash debt. It currently has 268 stores and will have more than 270 by June 30, the company’s managing director Chris Bryce told Business Spectator. The company’s debt, he says, will fall to about $10 million from about $40 million. By June next year The Reject Shop wants more than 300 stores. Long term it envisions more than 400. Its planned capital expenditure on new stores is $25 million. 

Bryce doesn’t envisage any change in consumer confidence over the next year. “Consumer are pretty cautious,” he says. “They’re always looking to save money.” Despite an aggressive store roll out plan, Bryce expects the company’s operating and gross margins to improve even as overall profit is crimped because of the costs associated with new store openings. He will not disclose the company’s margins or rent ratio to sales. But, Bryce adds, landlords, who formerly squeezed retailers are in a far weaker position to do so.

The Reject Shop’s shares are now at levels they were two years ago when the Queensland floods ruined the company’s major distribution center. Over the last 12 months, the stock’s total return has been 56 per cent, according to Bloomberg data, compared to the S&P/ASX 200 Index’s 17 per cent gain over the same period.

The company’s share price gain is a reflection that Australians have become much more focused on the bottom line. The carnage among retailers from Sydney’s Paddington to Bundaberg is proof that consumer are demanding a bargain. That may be very good for The Reject Shop and justify the company’s aggressive plans to open more stores. If Bryce and his management team’s projections on new store sales are met – the managing director won’t disclose them – The Reject Shop’s stock may reflect its increased sales and profits.

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