The Reject Shop shows signs of life

The bleeding hasn't stopped, but The Reject Shop is in better shape than it was a few months ago. After an atrocious start to the 2015 financial year, marked by aggressive competition, heavy discounting, a plunge in the Aussie dollar and ultimately a 5.4% fall in same-store sales, sales appear to be stabilising.

The company has announced a 1.7% fall in same-store sales in the second quarter. While this is still well below our expectations, the turnaround is encouraging and suggests new chief executive Ross Sudano's initial changes to the company's product mix since his appointment in September are starting to take effect.

In his first statement since joining the company, Sudano said: 'We have refocused the business on delivering great value on everyday products as the cornerstone of our customer offer with the expectation this would drive customer traffic. Our efforts in this regard are beginning to generate momentum, as evidenced by the stabilizing of comparative sales in Q2 and there are signs of continuing improvement in the early weeks of January. We have a significant opportunity to build on this improved sales momentum by better trading our variety categories. In addition, we are seeking to surprise and delight our customers with new and interesting products whilst they are in our stores, to add to our sales growth in the future.'

Sales for the six months to 31 Dec 14 increased 4.4% to $402m due to the roll-out of new stores. Net profit is expected to be between $12.7m and $13.0m, compared to $16.9m in the prior corresponding period, due to the added cost of refitting its entire network with new fixtures and shelves over the past six months to improve shelf space.

The stock has fallen 7% since The Reject Shop takes a dive from 27 Nov 14 (Buy – $6.35). We'll review the company in detail following February's interim result with an emphasis on Sudano's plans for the network expansion and how he will address declining margins. Until then, we're sticking with BUY for up to 3% of a risk-tolerant portfolio.