The Reject Shop swings to a full-year profit loss of $16.9 million

Article by James Hall / /
August 22, 2019 /
Click here to view original /

Struggling retailer The Reject Shop has reported a net loss of $16.9 million, a dramatic tumble from the $16.6 million profit from just a year earlier.

The discount store chain also revealed it had breached its repayment conditions to the bank, failing to meet its fixed-charge cover covenant at June 2019.

The company said it wouldn’t meet the covenant in September either.

The last few years have been littered with profit loss announcements from The Reject Shop with chief executive Ross Sudano stepping down in May during the most recent dose of bad news for the publicly listed company.

The bargain retailer has struggled for relevance as the distinction between its business and other bargain-filled chains has become increasingly blurred.

Retail experts say the embattled chain once occupied a unique place in Australian hearts, offering a range of playful and useful items for less than $5.

But it has been pushed out by competitors traditionally belonging at a higher price point in the market.

Consumers can now get their hands on a range of quality household items at Target or Kmart for spare change. Bunnings has encroached into its space with cheaper tools, while the major supermarkets’ increasing focus on own-brand goods means shoppers don’t need to stock up on The Reject Shop’s cheap lollies and decorations for the kids’ upcoming birthday party.

“We understand and accept shareholders will be extremely disappointed by the company’s performance,” chairman Bill Stevens said on Thursday.

Total sales for the 12 months to June 30 slipped by 0.8 per cent to $793.7 million, with comparable sales falling by 2.5 per cent on weak trading in Queensland, WA and the NT.

The company, which earlier this year rejected a $78 million takeover from packaging mogul Raphael Geminder, said sales had improved to 0.7 per cent on a comparable basis in the first seven weeks of the 2019/20 financial year.

It offered no concrete guidance going forward, but acting chief executive Dani Aquilina vowed the company would return to its roots as it attempts to turn the ship around.

“On close reflection we believe our divergence from our core strategy into higher priced fashion-based categories has let us down in the prevailing retail environment,” he said.

“We are focused on getting back to our roots and turning the business around. We are focusing on the categories our customers know us for and dialling up the essence of who we are, a discount variety store.”

University of Melbourne business trends expert Dr Lauren Rosewarne said Kmart’s rebranding in recent years meant customers could now buy low-priced goods “in an environment less ramshackle and a little more Zen than The Reject Shop offers”.

The chain must cut its losses and abandon empty and ageing shopping centres if the embattled retailer has any chance of survival, industry experts warn.

Of the remaining 357 stores in The Reject Shop network, analysts insist the best chance of survival is away from metropolitan shopping centres where foot traffic is falling.

The new boss should instead consider filling the gaps in regional and rural town centres that could be deserted by Big W and Target in the coming years, Queensland University of Technology associate professor Gary Mortimer said.

He told there was no space in the modern retail climate for the company without a drastic change of strategy.

“I don’t think there’s a clear value proposition for The Reject Shop when you look at Kmart and other cheap and cheerful divisions,” Dr Mortimer said.

“A move might be for The Reject Shop to potentially right-size their fleet, close those loss-making stores and position those particular businesses in regional centres where Target or Big W stores are closing.

“It’s not viable to be in a shopping centre competing against the likes of Aldi and Kmart.”

DGC Advisory retail analyst Geoff Dart agreed The Reject Shop had struggled to cope with the threat of online competition as well as the increasingly blurred distinction between it and the discount department stores.

“They have to reinvent themselves,” Mr Dart said.

“Clearly, just being cheap, general merchandise is not going to work. They have to hang their hat on something, and I’m struggling to think what that is.

“It comes back to retailers understanding why people go there and why they don’t go there.

“And that’s the problem at the moment. They haven’t understood why people don’t go there anymore.”