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“Sales miss” burdens The Reject Shop

rejects shop claremont villageReject Shop chief executive Ross Sudano has told investors that tough market conditions, backed-up inventory and rudimentary systems plagued the discount chain’s first half earnings, with the company revealing its drawn up a “combat program” for competition in Western Australia. 

Speaking to investors on Wednesday morning, Sudano said that while transaction growth was strong over Christmas, slumped activity before and after the peak period failed to drive the company’s 2 per cent sales target, forcing into discounting to clear excess stock.

“We finished the half with inventory levels higher than we planned,” Sudano said. “That’s primarily through a sales miss […] markdowns in January were necessary to clear big and bulky product through stores.”

The promotional activity dug into profits, which declined 4.4 per cent for the period, stirring further concern among shareholders that tough competition from the likes of Kmart and Aldi continues to plague results.

This was amplified by a particularly weak performance in Western Australia, where the German discount giant has been ramping up its expansion in recent months.

Sudano acknowledged adversely tough conditions in the state, telling investors that it had doubled down on physical and digital marketing as part of a battle plan to sure up key assets.

“We’ve refurbished four of our key trading stores in WA and we’ve put together a combat program to increase the frequency of our promotions,” Sudano explained.

“It’s helped in changing momentum, but down the line market conditions there are more challenging than in other markets.”

Sudano skirted around admitting that competitors were significantly biting into trade out west, pointing to positive comparable sales in South Australia where Aldi has also recently expanded, but not all shareholders are convinced.

Grant Oshry of Perennial Investments told Inside Retail that increased pressure from competitors is affecting results across the country, with Western Australia proving particularly difficult.

“It was a very tough performance for The Reject Shop in WA,” he said. “The core customer that shops in The Reject Shop is most likely to be shopping at Aldi as well.”

New programs

Sudano did admit that sales opportunities had been missed in the state, and indeed around the country, as the business looks to invest in standardised operating processes to slash costs and improve customer experience across its store network.

The focus has seen The Reject Shop trial a new ‘truck to customer’ program that hones in on generating end-to-end efficiencies through on overhaul of the company’s supply chain to shelf operation.

“The program provides us with a significant improvement in standardised operating processes in all stores over time and along with labor scheduling provides us with the tools to improve outcomes,” Sudano said.

The program has been “successfully” refined across test stores in the last half and has now been implemented in one Melbourne store, with additional roll outs to occur in the coming periods.

It’s part of a wider focus within the business to overhaul outdated processes and comes just after the group invested in a distribution centre relocation in Victoria, closing down their Tullamarine DC at the end of January for a new Melbourne DC that begun operating a few weeks ago.

According to chief financial officer Darren Briggs the new centre will generate $2 million in operational savings in its first year of operation, adding to a consolidation program that has also seen the company close four of its six container freight stations in China throughout half one.

Turning to automation

Following a decision last year to split with its previous buyer last year, Sudano told shareholders that the business has implemented a new automated demand forecasting system, which uses historical trend data to analyse and purchase stock.

Sudano hopes the change will boost their availability of core everyday variety items, which has been an ongoing issue over the last half, with sales being lost to disappointed customers who can’t find stock.

“We have been managing with fairly rudimentary systems with SKUs, how we put them into individual stores and how we forecast demand for each of those SKUs by stores.

“As we’ve implemented that system a key part of it is data integrity, so we’ve actually been tracking what our actual stock on shelf is versus our theoretical stock. We’ve discovered there’s been a different some times between 5 to 10 percent of our SKUs by stores,” Sudano explained.

On top of the new forecasting system, truck to customer program and distribution centre opening, The Reject Shop is also rolling out a new point of sale communication package to address store “look and feel” and new formats that seek to maximise sales per sqm across the portfiolio.

The communication program has been trialled in 100 stores over the half, and will be expanded in the second half based on customer feedback. New formats have been trialled in six stores so far, with Sudano saying that he’s seen an average 3-5 per cent comparable sales increase over the portfolio average.

The new format will be expanded to 18 stores in the next half, as part of a wider plan to open an additional 5 stores by the end of fiscal 17 and close at least one other due to unsustainable rent.

There’s a lot happening at The Reject Shop, a fact that didn’t go unnoticed by shareholders, who proceeded to inquire about the exact nature of many of the company’s new programs.

“I would prefer the more managed approach,” Oshry said. “There’s a lot happening, maybe a little bit too much.”

Oshry is optimistic about the new distribution centre, which is set to service 200 stores across Australia’s Southeast coast. He said that the DC is an opportunity for the company to move towards direct sourcing, in the same way Kmart has done in recent years.

“Gross margins and profitability can be replicated with large shopping and that’s what Kmart done, so that to me is something that The Reject Shop should unlock.”

The Reject Shop has been contacted for additional comment.

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