Chanticleer
Investors should Reject back-to-normal narrative
The Reject Shop’s profit downgrade is a warning to investors who believe we are through the fog of the pandemic.
The trading update released by The Reject Shop on Friday is important both for what it says about the state of the retail market and for the broader lesson it contains for investors who believe we’re through the pandemic fog.
Shares in The Reject Shop plunged 11 per cent in early trade after the company said sales for the 48 weeks ended May 30 were 1.4 per cent below the levels seen in the 2019 financial year. Stores in CBD locations and big shopping centres weighed on the result, falling 12 per cent over this period.
That foot traffic in CBDs isn’t back to pre-COVID-19 levels is to be expected. The struggles The Reject Shop is apparently having in large shopping centres is more of a surprise, and suggests investors in retailers and in retail landlords should be circumspect about the level of foot traffic they’re baking into forecasts.
The Reject Shop’s trading update shows the COVID-19 fog hasn’t cleared. David Rowe
Indeed, there appears to be a level of caution inside The Reject Shop about these CBD and large metropolitan stores ever getting back to their former glory.
Of the 47 stores in these locations, 35 of the leases either expire in the next few months, are being renegotiated or have been renegotiated. The Reject Shop says it is prepared to shut stores where landlords won’t do deals that “reflect the current sales opportunity”.
There’s a bit of posturing here, to be sure. But with The Reject Shop now predicting earnings before interest and tax for the full year will come in between $8 million and $10 million – well down on consensus forecasts for EBIT of about $12.25 million – the group isn’t in a position to carry uneconomic stores.
The lesson here isn’t confined to retail. As PIMCO chief investment officer Dan Ivascyn said at Morningstar’s Australian investment conference on Thursday, markets have priced in an extremely optimistic view of the world, despite the uncertainty inherent in the post-COVID-19 period.
Melbourne’s lockdown has provided a stark reminder of the possible speed bumps along the way. But even without these major disruptions, The Reject Shop’s trading numbers point to a new normal, where consumer habits look almost the same as they did before the pandemic, but not quite.
Investors should be on the lookout for further examples of these small but important changes in customer behaviour in the August reporting season. And they should be wary of predictions like that made by The Reject Shop on Friday when it said “customer shopping behaviour will normalise once broader concerns around COVID-19 reduce”.
The new normal might look similar to the old normal, but it won’t be exactly the same. And the little differences will matter.
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