Discount retailers on struggle street

Reject ShopThe challenges confronting Big W and Target are also impacting on The Reject Shop.

The Reject Shop has aggressively expanded its store network with acquisitions and greenfield openings. It acquired non-clash sites from Jan Cameron’s collapsed Retail Adventures discount chains and currently has around 350 stores.

In an update not received well by investors, the company has now indicated it expects to record an operating loss in the current half and is likely to withhold a dividend payout for the full financial year.

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Ross Sudano, managing director of The Reject Shop, told investors that challenging retail trading conditions that were flagged at the half year results announcement have continued into the third quarter, prompting the revised full year trading forecast.

Sudano said all states posted negative comparable store growth in the third quarter, with the worst same store results occurring in Western Australia and the Australian Capital Territory.

“Underlying customer numbers continue to be below the same time as last year, resulting in negative underlying comparable sales of approximately four per cent for the half year to date.

“Assuming current tough market conditions continue through the end of the financial year, the company expects to report a net operating loss in the second half of at least $5 million,” Sudano said.

“This will reduce the full year net profit to approximately $12.5 million. Given the fall in projected earnings per share, and working capital requirements, the company is unlikely to declare a final dividend.”

Sudano said the company remains fully compliant with debt contracts and has its inventory levels under control.

He also assured investors that The Reject Shop management has a strategy to address faltering sales by altering the product mix and actively rebalancing marketing activity and in-store activity to emphasise a stronger blend of everyday value, as well as enhanced customer communication and in-store presentation.  

Time to shut up shop?

The issue is whether or not The Reject Shop is over-stored and should be closing under-performing and overlapping stores.

Many retailers that have come to grief over the years or have found themselves struggling in economic downturns are victims of over-reaching on their store networks as a market share strategy.

The Reject Shop is not in any dire straits by any means, but it is trading in a category that is clearly overstored and struggling.

Target’s sales for the third quarter plunged 18 per cent in a continuing downward spiral that has defied transformation programs pursued over more than five years under three managing directors.

Woolworths’ Big W third quarter results also saw sales fall sharply by 8.6 per cent, as the chain also seeks to turn around its fortunes under a fourth managing director.

Target and Big W are both on track to report further full financial year losses.

Big-W_Craigieburn-CentralIn the case of Big W, Woolworths has warned investors a projected loss of $88 million for FY2017 will now balloon to between $115 million and $135 million.

Like The Reject Shop, both Target and Big W management report challenging market conditions.

Guy Russo, who is now CEO for both the solidly performed Kmart and the struggling Target, said in a report to investors that Target’s poor results reflected the ongoing transition of the business.

“During the quarter, the reset of merchandise disciplines was further progressed and the transition to everyday low prices continued, with higher levels of full price sales and lower levels of clearance activity achieved relative to the prior corresponding period,” he said.

“Trading momentum is expected to remain challenging in the fourth quarter, but reset merchandise disciplines are expected to support improvements in the quality of sales recorded.”

Higher levels of full price sales may have been bolstered by the transformation strategy to date, but an 18 per cent fall in total sales for the latest quarter and a 17.6 per cent decline year to date suggests there is a very Big hole to fill.

Commenting on the ongoing problems with Big W, Woolworths CEO, Brad Banducci, said the chain is still in the early stages of a turnaround program.

Banducci said Big W management is focused on the “many opportunities” of further improve the business for the benefit of customers, team members, suppliers and shareholders.

Banducci described Big W as a work in progress and warned its turnaround would be a multi-year journey.

“Due to the investment we are undertaking as part of our revised plan, we currently expect Big W to report a loss before interest and tax of $115m to $135m for the second half of FY2017.”

Banducci said comparable sales were impacted by apparel clearance activities, driving deflation as the chain cleared summer inventory to make way for new season apparel.

“The home category performed well on the back of our new design-led product, while womenswear sales remained weak and deflation increased to 5.4 per cent in the quarter compared to the same period in 2016.

“We completed a review of the Big W strategic plan and customer value proposition during the quarter.

“While this will continue to be refined, we are now in the process of implementing this plan.

“We are working hard to restore price trust with our customers, the process of which has already begun.”

Future-proofing The Reject Shop

Back at The Reject Shop, Sudano says the company has made progress with efficiency initiatives that could potentially protect against some of the erosion of profits resulting from tough trading.

The Reject Shop’s third quarter revenues were up two per cent, but down by 0.5 per cent on a like-for-like basis, as slight increases in basket sizes were offset by lower customer counts.

Sudano said that despite the below expectation sales performance for The Reject Shop in the third quarter, the company has been actively managing its inventory position through the half.

Sudano conceded the latest result is a “disappointing development for our shareholders and an under-performance”.

“The extremely challenging external environment, as well as execution issues with our merchandising strategy, have combined to deliver a weak sales trend, outweighing the positive sales momentum achieved during December.

“Recent sales results as well as feedback from customers tell us that, in attempts to broaden our focus on introducing new and fresh products, our merchandise mix has moved too heavily towards a focus on variety products.

“This reduced focus on our everyday value and bargains and its impact on our in-store promotional program has adversely affected our foot traffic.

“Coupled with the challenging market environment, where customers are reducing their discretionary spend, our promotional activity has not generated the incremental foot traffic required to grow comparable sales,” Sudano told investors.

An international invasion

The problem for The Reject Shop, Target and Big W is that while market conditions might improve in the months or years ahead, competition in the category is intensifying – competition from more nimble retailers who are not weighed down by a network of under-performing and unprofitable stores and locations that are no longer optimum for customer attraction or retention.

The increasing competition in the category includes the physical entry to the Australian market of Amazon, as well as the opening of the launch of the TK Maxx stores, the expansion of Costco and the potential launch of the German Kaufland superstores.

Kaufland is a sister chain to the Lidl grocery discount stores and has more than 1,200 stores in Europe.

There are also Japanese chains with an eye on the Australian market, although Daiso has not met its original store development plans.

For The Reject Shop, Target and Big W, the expansion plans of both Costco and TK Maxx represent the greatest bricks-and-mortar challenge, but Amazon will also impact on their sales and profitability and, no doubt, force them to rethink their retail offer.

The TK Maxx effect

TJX, the United States parent of TK Maxx, is currently launching 35 stores in Australia, revamping and rebranding the Trade Secret stores the American retailer acquired from Gazal Corporation in 2015 for $80 million.

TJX has close to 3,500 stores in the US, Canada and Europe across six retail brands T.J.Maxx, Marshall, HomeGoods, Trading Post, Winners, and HomeSense.

TJ Maxx is a fast fashion chain that poses a stronger, more direct threat to Target, Big W, Kmart, Best & Less and Harris Scarfe than The Reject Shop because its bread and butter sales are in apparel.

However, the TK Maxx stores also sell beauty and homewares.

The entry of new global competitors to the discount category could not have come at worse time for the strugglers battling to retain customers and defend market share, let alone increase sales and earnings.




  1. Woofer posted on May 10, 2017

    They have taken a great business and wrecked it. How did they wreck it not listing to there staff. Not listing to there customers . Not understanding how the discount business works. Putting sku,s in at prices that don't match the name over the door. Discount variety business. Allowing K Mart to move into there space and doing nothing about it. Stores are not up to date has been the same model for over ten years.

  2. Elequant posted on May 31, 2017

    They have not done much wrong woofer apart from expanding too quickly. They still have a great range at great prices and are willing to try new products but it's the same story with most Australian retailers the high labour and rental costs in this country will eventually mean that the business becomes unviable.

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