Despite a solid interim result for struggling discount retailer The Reject Shop, the shares sold off by more than 8% yesterday as investors initially took fright at a surprise $25 million heavily discounted share issue.
Following Reject’s AGM, the broker has cut its earnings forecasts by 20% and 16% in FY15 to reflect largely flat sales and margins. TRS has yet to show any leverage from its store expansion and logistics improvements despite the opportunity they provide, suggesting to the broker the company is under-earning and there are more operational improvements to be made.
The Reject Shop had been travelling okay into May until warm weather killed off winter-related sales and budget fears hit consumer confidence (at the $2 shop?). TRS has downgraded FY14 profit guidance to $14.5-15.5m from $17-18m forcing the broker to cut earnings forecasts by 17% in FY14-15.