Shares in The Reject Shop have plunged more than 23 per cent after the company blamed a poor pre-Christmas trading period and a heavier-than-expected discounting for flat like-for-like sales in the first half.
The company said that the performance of stores in smaller shopping centres and across regional areas was good, but this was offset by weaker results from stores in major malls.
Existing leases on stores in major centres will be seen through, but managing director Chris Bryce said they leases would be reviewed as they approach expiration and the discount retailer has not ruled out leaving major shopping centres altogether.
“If we can’t get terms acceptable to us, then they will close,” Mr Bryce said. “This half, we have four stores to potentially close subject to finalisation of negotiations with landlords.”
Centre redevelopment projects, foot traffic and competition from department stores and other discount chairs, all place pressure of sales in major centre stores, Mr Bryce said.
“We flagged major centres as a significant strategic focus and these stores continue to be an overall drag on our performance,” he said.
However, The Reject Shop will push ahead with its focus on smaller centres and regional areas. It will open 12 new stores n the second half of this financial year after opening 33 new stores in the first half.
“That’s where we’ve been traditionally focused over the last few years and that’s where we plan to be this half and going forward,” Mr Bryce said.
The company said on Friday that total sales increased 17.7 per cent over the previous corresponding period to $385.5 million, but comparable store sales were flat overall, due mainly to a poor trading in the crucial pre-Christmas period.
Gross margins were also well below the company’s expectations due to higher-than-expected discounting and poor returns from products in its higher margin categories.
The stock fell 23.4 per cent to $12.90 in early trade on Friday. Last week, shares in Super Retail Group fell by more than 14 per cent in a day after it announced a similarly disappointing sales result.
Mr Bryce has warned that the second half could also be challenging, with the falling Australian dollar likely to hurt margins.
“The reducing Australian dollar will continue to require significant focus and planning over this half and into next year, and we have already addressed some of the areas which resulted in a lower margin result this half.”
As a result of the higher stores opening costs, net profit for the first half is forecast to be between $16.6 million and $16.9 million, compared with $20.1 million last year.
Mr Bryce is forecasting full-year net profit, including store opening costs, will be between $17-18 million, compared with $19.5 million in 2012-13, although this figure included a $2 million insurance recovery.
“We remain confident of our ability to leverage off the significant growth in stores and infrastructure over the past 18 months, and will therefore continue to seek the identified growth opportunities for our business.”