Jarden Research downgrades The Reject Shop from a Buy to Overweight
But price target is still set high at $5.80, versus current price of $3.30
Despite facing challenges, TRS remains undervalued, says Jarden
Jarden Research has slapped an Overweight recommendation (previously Buy) on The Reject Shop (ASX:TRS), with a $5.80 price target (versus current price of $3.30).
The Reject Shop is a $125m market capped discount variety retailer, offering a wide range of everyday items, including homewares, apparel, stationery, and even groceries. Established in 1981, it has now grown to over 350 stores across Australia.
Jarden believes TRS presents an attractive investment proposition, and could deliver favourable returns for investors seeking growth and stability in the retail sector over the long term.
However while the long-term outlook appears promising, there are currently obstacles to overcome, says Jarden.
The retail sector is witnessing significant transformations, propelled by factors like inflation and changing consumer spending patterns. Historically, discounters like TRS thrived amidst inflationary environments, offering consumers affordable alternatives.
But as inflation moderates, traditional supermarkets are regaining momentum, posing challenges for discounters.
Jarden asserts that TRS can withstand market shifts by focusing strategically on consumables and essential products.
“TRS has improved strategy around range, sourcing and transaction growth, attracting more shoppers to stores,” added the broker.
“Key focus now is to keep customers and driving the flywheel to accelerate purchase frequency, items per basket and then, in turn, sourcing.
“This, if successful, should drive a material EBIT uplift medium term.”
Dollarama can offer TRS a blueprint for success
At the moment, TRS not only faces competition from both traditional retailers like Kmart and Big W, but also from emerging online players like Amazon and Temu.
“We believe Temu is growing fast and expect there will be more competition from it in the next 12 months given how fast it gained share in the US dollar store space,” said Jarden.
However Jarden believes that the TRS’s strategic emphasis on product mix, sourcing capabilities, and store locations will set it apart.
Jarden looked at what has made Dollarama, in particular, stand out as a shining example of success in the dollar store industry in North America.
The broker believes there’s an opportunity for The Reject Shop to draw inspiration from Dollarama’s achievements and potentially adopt a comparable strategy within the Australian market.
“We look at what has driven successful global discounters like Dollarama and Poundland and see mix – range, own-brand, store locations (non-mall) and sourcing as key for TRS to maintain and grow market share in Australia,” the research note said.
With an impressive return on invested capital (ROIC) of 25.8%, far surpassing competitors, Dollarama has cemented its position as the most profitable dollar store in the US and Canada.
Several factors contribute to Dollarama’s remarkable success story.
Firstly, operating in the Canadian market provides inherent advantages over its US counterparts as it faces less competition there.
Dollarama’s success is also attributed to its astute business strategies. The company maintains a diverse product mix, with a significant emphasis on private label items and discretionary goods.
This, coupled with a commitment to refreshing 25-30% of its product SKUs annually, ensures a constant stream of attractive offerings for customers.
Through implementing these tactics, alongside a vibrant presence on social media and cost-efficient marketing strategies, Dollarama has been able to interact with customers while maintaining low prices.
TRS still undervalued
So, despite challenges like margin pressures and intensified competition, Jarden believes The Reject Store remains undervalued.
Jarden highlights TRS’ holdings of $80 million in net cash.
The broker also notes that TRS’s estimated earnings per share (EPS) for fiscal year 2025, excluding cash reserves, is valued at only 10 times earnings, indicating that the stock may be undervalued when compared to its peers.
However, Jarden fired off this warning.
“Discounters had outperformed post-COVID as inflation surged, consumers focused on price vs. broader value offer and cross-shopped more.
“This drove strong growth at discounters, benefiting the likes of Aldi and TRS locally.
“Now, however, as prices moderate we are starting to see supermarkets returning to volume growth as they focus on deeper promotions, expansion of private label and everyday essentials.
“We therefore cut TRS to Overweight from Buy as high conviction on dollar stores continuing to gain share from supermarkets drops with more risk on competition from marketplaces,” said Jarden.
The views, information, or opinions expressed in the interview in this article are solely those of the broker and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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