Eley Griffiths: The Reject Shop

Fix. Reset. Grow. A Retailing turnaround.

I’m a subscriber to the theory that companies exhibit life cycles. Inception, growth phase, operational plateau then a decline in fortunes. Examples of life cycles abound. Turnarounds are the next stage but sadly most don’t turn.

The Reject Shop is a classic turnaround play with sufficient levers to ensure a major earnings revival is given every chance of success. It currently operates ~350 stores Australia wide selling discount variety goods in neighbourhood shopping centres.

First, a seasoned new Chairman joined the board last year. Veteran discount variety retailer, Andre Reich, then assumed the CEO role. A new C-suite and general management were installed in the business. Head office was right-sized and a new corporate maxim was born – Fix. Reset. Grow.

Second, equity was raised in February this year with longstanding bankers, ANZ, appeased. Management then moved to remove cost and simplify the business. Stock Keeping Unit’s are being managed down from 12800 to 4000 units.  Across the property lease book, an average two year tenor suggests better rental terms might not be too far away.

Third, operating ratios for each store have emerged as a major focus area, including inter alia, wages/sales, rent/sales, stock/store, stock turnover and shrinkage levels.  Supposedly these metrics had been bent out of shape for eternity. To this end management strongly believe each store can be run with McDonalds-like efficiency.

Management have been busy with several sales initiatives with the recent exclusive Tesco deal an early look-in on the inventive merchandising strategy in play.

Valuation on a FY21 EV/EBITDA of approximately 6.0x appears reasonable for this retailing comeback.

Eley Griffiths Group (EGG) was established in 2003 as an independent investment manager that specialises in ASX- listed small and emerging companies. The group manage a number of wholesale investment mandates as well as two highly rated retail funds-The Eley Griffiths Group Small companies Fund and the Eley Griffiths group Emerging Companies Fund.

This information has been prepared and provided by Eley Griffiths. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.