TRS the reject shop limited

Ann: Change in substantial holding from IFL, page-7

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    Source: https://www.intelligentinvestor.com.au/no-interest-in-the-reject-shop-1863776
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    Question
    Any chance of another look at TRS? Thanks!

    Answer
    Hi Peter. I’ve spent 20 minutes looking at The Reject Shop (the first look since The Reject Shop comments in November). First of all, I must say I cannot provide personal advice and these general comments may not be suitable for you. We don’t cover the stock and have therefore not had a close look.

    When a retailer trades at under 3 times EBITDA, it’s either seriously cheap or a bankruptcy candidate. My suspicion is this one is more likely the latter than the former. It’s important to be aware that retailers that are experiencing troubles can go wrong very quickly. Management has its work cut out to fix the merchandising mistakes revealed in this month’s ‘trading update’. Also, companies that are not experiencing troubles never need to say ‘The Company remains fully compliant with its debt covenants’. That statement, the need for working capital, and the decision to cancel the final dividend tell you this retailer is sailing close to the wind.

    The Reject Shop also has a confused strategy and confused branding, while competition is hitting from all sides. Lower grocery prices are hitting its everyday items strategy, while Kmart really is a class act when it comes to merchandising discount variety. You only need to walk around a Kmart to see how good its merchandising is in this customer demographic. Management blames ‘challenging retail trading conditions’ when really it’s renewed competition that is likely to be the problem.

    My view is that, in the current retail climate, you only want to own retailers that have a defined strategy/niche and/or that are of a size that they can survive any mis-steps. The Reject Shop does not meet that definition. While management may be able to turn it around – or it might be taken over – I think the risk of failure here is high. It remains in the too hard basket for us. Cheers, James G James Greenhalgh
 
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