Some Numbers

Ok – so we have no announcements re performance for 2014/15 but have seen the share price retract from $7.00 to $5.40 in one month (22.8%). So it is either significantly undervalued and a great buying opportunity or something has really gone wrong. Assuming nothing has gone significantly wrong (ie no announcements) and I am a half glass full sort of person then what could the full year numbers look like?

Second Half Sales: If we use the starting point of 337 stores (December 2014 number) and assume the average sales per store is 2% less per store than the 2nd half of 2013/14 (Jan to June) then we have a second half sales number of $360.2m. Note in the 1st half sales per comparative store were down 1.7% in the 2nd Qtr. So assuming a decline of 2% is hardly being aggressive. I have not allowed for any store openings or closings but obviously there will be some. So full year sales would be $762.4m up $50.9m (7.2%) on the prior year. The sales increase is driven by new stores (the year started with 321 stores up 46 stores from the start of the financial year 2014).

So if full year sales are $762.4m (or there about) it is hardly a shabby number. There would be many a bricks and mortar retailer who would love to have that sort of growth (even if driven by none sustaining store growth).

NPAT: Where in the hell do we start? Looking at the half year results there is a raft of supply chain projects and you would have to be Nostradamus to try and determine what they mean to the bottom line. I take the view the decline in the $A will not only swallow these up but reduce the margin significantly. The first half margin was 3.2%. I am assuming a 1% margin in the 2nd Half. I take the view that if you are going to sell $360m in half a year then surely you can make 1c out of every dollar stick to the bottom line. There has been no flood or announcement to say a catastrophic event has occurred. If you can’t make 1 cent in the dollar stick then what is the point of being in business (having said the 2nd half last year was negative 0.7% - cost the CEO his job and rightly so). So a 1% margin for the 2 half gives us a $3.6m NPAT. Full year results are therefore sales of $762.4m giving a NPAT of $16.4m. This is $1.9m (13.1%) up on last year.

What does it mean for Share price? I have 29.076m shares on issue. The $16.4m profit equates to 56.4cents per share. The sector average PE ratio is 15, the market is 16 and TRS 12.6(approx.). If it stays at 12.6 then the SP should be $7.10. If you use the sector average then the SP should be $8.46.
So is the Reject Shop a great buy? I say on the current information it is significantly undervalued. However I get the feeling the market has factored something in that I am not aware of (all investors are treated equally but some are more equal than others – apologies to George Orwell).

Guess time will tell – it always does.

PS – I do not work for IOOF and have not cut and pasted from other reports!