The Reject Shop braces for losses amid foot traffic and supply chain woes

The Reject Shop is bracing for earnings losses in the months ahead as stock issues, border closures and reduced foot traffic hit its retail sales.

The Reject Shop increased profit in the first half but has cautioned on second-half earnings. Picture: Monique Harmer

The Reject Shop is bracing for earnings losses in the second half of the financial year, as lockdowns, border closures and reduced foot traffic in CBDs and shopping centres hit retail sales.

A sluggish international supply chain, choking stock availability and driving up costs through higher shipping charges, will compound the earnings challenges, the retailer said on Wednesday, as it handed down its first-half result.

For the six months through December, The Reject Shop posted a 46.5 per cent rise in net profit, to $16.3m, despite sales dropping 0.3 per cent to $434.3m.

Sales during the half were impacted by state government lockdowns and border and travel restrictions across the country, as well as stock issues due to international shipping delays. Picture: Matthew Vasilescu

Sales during the half were impacted by state government lockdowns and border and travel restrictions across the country, as well as stock issues due to international shipping delays.

Three new stores were opened and one CBD store was closed during the half. Comparable store sales were flat on the prior corresponding period.

“The first-half result and the progress made during the ‘fix’ phase (of the turnaround strategy) is pleasing,” the retailer’s chairman Steven Fisher said.

“During the second half, The Reject Shop will continue to navigate the challenges associated with COVID-19 as well as the international supply chain. We are targeting to complete the ‘fix’ phase by the end of fiscal 2021.”

The turnaround strategy is the discount retailer’s three-phase plan to fix, reset and grow the business.

While pleased with the first-half performance, Mr Fisher cautioned that it should not be used as an indicator for the second half.

“The company typically generates a higher proportion of full-year sales in the first half and has reported (pre-tax earnings) losses in the second half over the past two financial years. The same is expected in the second half of 2021,” he said.

“During the second half, management will continue to focus on cost reduction, driven by business simplification and operational efficiency.”

No interim dividend will be paid to shareholders as the retailer focused on ‘fixing’ the business and amid the uncertain operating environment.

Ord Minnett analysts labelled it a strong result, saying there was “clear evidence” of execution of the plan laid out by management.

“The outlook was admittedly soft, however we view this as a short-term factor in what is a multi-year growth story and would take advantage of any opportunities to accumulate,” they said.

The Reject Shop shares closed up 15c, or 2 per cent on Wednesday at $7.56.