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Demand for ‘essential’ products powers The Reject Shop into profit

The Reject Shop’s turnaround plan is working.

Discount retail chain The Reject Shop has reported a $1.1 million profit in FY20 off the back of strong demand for everyday essentials across the cleaning, grocery, pet care and toiletry categories.

The full-year result is a significant improvement from the $16.9 million loss the company recorded in FY19 and shows that the turnaround strategy – a three-phase plan to fix, reset and grow the business – is working, according to TRS chairman Steven Fisher.

“The new leadership team has stabilised the business – the company has returned to profitability, has significantly reduced its inventory and has a strong balance sheet,” Fisher said in a statement about the FY20 results on Wednesday.

The company is currently in the fix phase, which is all about simplifying the business and cutting costs. This can be seen in the reduction of in-store labour costs from 15.4 per cent of sales in FY19 to 14.5 per cent in FY20, thanks to a new rostering system that uses machine learning, and a 20 per cent reduction in head office jobs in April, though this added $1.5 million in one-off redundancy costs in FY20.

Occupancy costs remained flat in FY20 at around 14 per cent of sales, which the company called “too high”. Leases will be renegotiated as they come up for renewal, with 87 leases in holdover or set to expire in FY21, and another 130 set to do so in FY22. The Reject Shop has 354 locations in total across Australia.

The company has also gained operational efficiencies from its new approach to merchandising, which includes using more shelf- and floor-ready products and displaying high-volume products on the pallets they arrive on.

Later, the reset phase will involve delivering on The Reject Shop’s lowest price guarantee, homing in a smaller number of core categories and rolling out a consistent and improved store layout across the network. The grow phase will involve initiatives to improve customer loyalty and drive new customer acquisition by opening new stores and ramping up online.

CEO Andre Reich said there is more work to be done in the fix phase before the company can focus on the reset and grow phases, but some of the groundwork for those phases has already been laid.

The company launched a new e-commerce site this week, and it started the shift towards more essential products in the second half of FY20 in response to an uptick in demand during the global Covid-19 pandemic.

The company reported a material increase in sales in the second half of FY20, with the cleaning, grocery, toiletry and pet care categories performing particularly well. There was also increased demand for craft and stationery products, toys, garden items, furniture, electronics, hardware and kitchen items, reflecting the fact that many consumers were spending more time at home. At the same time, there was reduced demand for traditionally strong categories, including Easter-related products, luggage, party and events and cards and gift wrap.

Overall, FY20 sales were up 3.4 per cent on the prior corresponding period to $820.6 million. Comparable store sales were up 7.1 per cent in the second half, up from 0.5 per cent in the first half, equating to a 3.5 per cent year-on-year increase.

The shift in sales mix towards lower-margin essential products rather than general merchandise contributed to a decline in gross margin by 125 basis points to 40.9 per cent. This also reflects the impact of markdowns taken on aged inventory in Q4 and the expectation of further markdowns planned for FY21, as well as the higher supply chain costs associated with higher sales in the second half.

However, reduced shrinkage helped the company grow gross profit to $342.4 million, taking into account the new lease standard. This was up on FY19.

Statutory net profit after tax was $1.1 million in FY20. Not including the new lease standard, NPAT was $2.7 million. Either way, the company is back in the black after recording a $16.9 million loss in FY19.

“The Reject Shop is well positioned to navigate the uncertain trading environment with its improved profitability and strong balance sheet – though there is more work to do to fix the company before we reset and grow,” Reich said.

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