Broker Downgrades The Reject Shop, But Still Gives It a Big Price Target

• Jarden Research downgrades The Reject Shop from Buy to Overweight
• But the price target is still set at $5.80, up from $3.30 currently.
• Despite challenges, TRS remains undervalued, says Jarden

Search Jarden slapped a Overweight recommendation (previously Buy) on The Reject Shop (ASX:TRS)with a Price target of $5.80 (from the current price of $3.30).

The Reject Shop is a $125 million capped discount variety retailer, offering a wide range of everyday items including home goods, clothing, stationery and even groceries. Established in 1981, it now has more than 350 stores across Australia.

Jarden believes that TRS presents an attractive investment proposition and could generate favorable returns for investors seeking growth and stability in the retail sector over the long term.

However, while the long-term outlook looks promising, there are currently still hurdles to overcome, says Jarden.

The retail industry is undergoing significant transformation, propelled by factors such as inflation and changing consumer habits. Historically, discounters like TRS have thrived in an inflationary environment, providing consumers with affordable alternatives.

But as inflation slows, traditional supermarkets are regaining momentum, posing challenges for discounters.

Jarden says TRS can withstand market changes by strategically focusing on consumables and essential products.

“TRS has enhanced its strategy in range, supply and transaction growth, attracting more buyers to stores,” the broker added.

“The main objective now is to retain customers and drive the flywheel to accelerate purchase frequency, items per basket and then, in turn, supply.

“If successful, this should lead to a significant increase in EBIT in the medium term.”

Dollarama can offer TRS a model of success

Currently, TRS not only faces competition from traditional retailers like Kmart And Big Wbut also emerging online players like Amazon And Temu.

“We believe Temu is growing rapidly and expect there to be more competition from it over the next 12 months, given how quickly it has gained market share in the sector U.S. dollar stores,” Jarden said.

However, Jarden believes TRS’s strategic focus on product mix, sourcing capabilities and store locations will set it apart.

Jarden looked at what did Dollaramain particular, stand out as a shining example of success in the dollar store sector in North America.

The broker believes there is an opportunity for The Reject Shop to learn from Dollarama’s achievements and potentially adopt a comparable strategy in the Australian market.

“We look at what has driven successful global discounters like Dollarama and Poundland and see the combination – range, own brand, store locations (excluding malls) and sourcing as the key for TRS to maintain and grow its market share in Australia,” the research notes. said.

With an impressive return on invested capital (ROIC) of 25.8%, far surpassing its competitors, Dollarama has solidified its position as the most profitable dollar store in the United States and Canada.

Several factors contribute to Dollarama’s remarkable success.

First, operating in the Canadian market offers inherent advantages over its American counterparts, as there is less competition there.

Dollarama’s success is also attributed to its astute business strategies. The company maintains a diverse product line, with a significant emphasis on private label items and discretionary products.

This, coupled with a commitment to refresh 25-30% of its product SKUs each year, ensures a constant flow of attractive offers for customers.

Through the implementation of these tactics, along with a dynamic social media presence and cost-effective marketing strategies, Dollarama has been able to engage with customers while maintaining low prices.

TRS still undervalued

So, despite challenges such as margin pressure and intensifying competition, Jarden believes The Reject Store remains undervalued.

Jarden points out that TRS holds $80 million in net cash.

The broker also notes that TRS’s estimated earnings per share (EPS) for fiscal 2025, excluding cash reserves, is valued at just 10 times earnings, indicating that the stock may be undervalued relative to its peers.

However, Jarden issued this warning.

“Discount stores outperformed post-COVID as inflation rose, consumers focused on price rather than a broader value offering, and did more cross-shopping.

“This has led to strong growth among discounters, benefiting companies like Aldi and TRS locally.

“Now, however, as prices moderate, we are starting to see supermarkets return to volume growth by focusing on deeper promotions, private label expansion and everyday essentials.

“We therefore reduced TRS to Overweight from Buy as strong conviction on dollar stores continuing to gain share from supermarkets diminishes with more risk on market competition,” Jarden said.

Any views, information or opinions expressed in the interview in this article are solely those of the broker and do not represent the opinions of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed any responsibility for the financial product advice contained in this article.