AU : The Reject Shop - Cost out on track, still waiting on sales consistency

FY21 EBIT guidance disappoints (c25% below consensus) with sales deficits in CBD/large shopping centre stores the main driver, in addition to higher supply chain costs. The problem stores are those already largely targeted for closure at next renewal. The path forward is clear – secure material rental reductions or close the stores over the coming 12-18 months. Either way, we see scope for most of these stores to swing back to profitability reasonably quickly. We think TRS can resolve/offset current headwinds reasonably quickly, while the underlying cost reduction strategy is on track. We maintain an Add rating (A$6.80 PT), but have some lingering concerns about the group’s ability to deliver positive sales momentum for sustained periods in the long term – it’s been elusive thus far.

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