Release Date: February 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sales increased by 4.2% to $458.3 million, with comparable store sales up 2.3%.
- Gross profit rose by 3.6% to $185.1 million on a pre-AASB 16 basis.
- The company ended the half-year with a strong balance sheet, holding $80.7 million in cash and no drawn debt.
- The new merchandise strategy showed positive early signs, contributing to increased customer transactions and units per basket.
- The Board declared a fully franked interim dividend of $0.10 per share, the first interim dividend since February 2019.
Negative Points
- EBIT decreased by 16.1% to $19.4 million, and PAT fell by 12.5% to $14.3 million.
- Gross margin was negatively impacted by higher-than-anticipated shrinkage and a shift in product mix towards lower-margin consumables.
- The cost of doing business increased to 34.8% of sales, up from 34% in the prior period.
- Store labor costs rose from 12.9% to 14% of sales, contributing to higher overall store expenses.
- The company experienced inflationary pressures and higher domestic supply chain costs, partially offsetting the benefits from reduced international shipping costs.
Q & A Highlights
Highlights of The Reject Shop Ltd (ASX:TRS, Financial) Earnings Call
Q: Can you provide more details on the performance of consumables versus general merchandise?
A: Clinton Cahn, CEO and CFO: Consumables represented about 46% of sales in the first half, up from 42% in the previous period. Consumables had double-digit growth driven by increased units per basket. General merchandise saw a low-single-digit decline but had double-digit unit growth, particularly in seasonal items like Christmas and Halloween.
Q: What strategies are in place to address shrinkage, which impacted margins significantly in the first half?
A: Clinton Cahn, CEO and CFO: We are treating shrinkage as a cost of doing business and will adjust product margins accordingly. Strategies include eliminating high-shrink products, enhancing store security, and working with landlords and police. We expect gross profit margins to be in the range of 38.5% to 39% for the second half.
Q: How do you see the balance between consumables and general merchandise affecting profitability in the second half?
A: Clinton Cahn, CEO and CFO: We expect consumables to remain strong, but general merchandise is showing signs of improvement. Easter is a key period for both categories. We aim to shift the sales mix back towards general merchandise to improve margins.
Q: Can you explain the increase in store costs and whether there are plans to moderate these in the second half?
A: Clinton Cahn, CEO and CFO: The increase in store costs was in line with expectations. We made significant changes in merchandise and product ranges, which required additional labor. We expect labor costs to be around 14.6% of sales for the full year, slightly higher than initially planned.
Q: How are you leveraging scale to improve sourcing and reduce costs?
A: Amy Eshuys, COO: We have focused on building direct relationships with factories, particularly in home and kitchen categories. This has improved product quality and pricing. We aim to increase direct sourcing to 30-40% over the next year.
Q: What is the current shrinkage rate, and how does it compare to historical levels?
A: Clinton Cahn, CEO and CFO: Historically, shrinkage has been just over 2% of sales. It increased by 75 basis points in the first half. We expect the impact to be less significant in the second half.
Q: Given the ongoing stock take, could there be variations in the shrinkage rate?
A: Clinton Cahn, CEO and CFO: While the stock take is not yet complete, we have counted about 80-85% of stores and do not expect significant variations. The impact on gross profit margin should be minimal.
Q: How do you plan to manage the cost of doing business in a high-inflation environment?
A: Clinton Cahn, CEO and CFO: We are focusing on cost control measures, including optimizing labor and store expenses. Administrative costs are expected to be lower than previously guided, and we are managing other store expenses effectively.
Q: Are there opportunities to partner with larger retailers for sourcing to improve scale?
A: Amy Eshuys, COO: We are open to partnerships and often engage with sourcing teams in China. We aim to learn from other retailers and improve our sourcing strategies to achieve better scale and cost efficiencies.
Q: What are your expectations for gross profit margins in the near and long term?
A: Clinton Cahn, CEO and CFO: In the near term, we expect gross profit margins to be in the 40-41% range. Longer term, as we improve product mix and margins, we aim to reach historical levels of 42-44%.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
