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The Reject Shop (ASX:TRS) has popped +110% in early afternoon trades following a binding deal from Canada’s Dollarama to buy TRS for $6.68/sh – roughly $260 million.
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For TRS shareholders, the news is obviously more than welcome. Shares opened just over $3/sh on Thursday. A 77c dividend payout doesn’t hurt either.
The question for Dollarama is whether or not its purchase of The Reject Shop is the best thing for its interests. On Thursday, TRS shares returned to a three-year high.
The last time TRS shares were worth $6.60 was in February 2022. Jarden Research had put a target price of $5.80 on the stock in June 2024, when the stock was worth $3.30. Prices were at $5.45/sh in January last year.
But in February 2022, when shares were $6.60, a half-year earnings report showed profits after tax (NPAT) of $15.4M – down -9% vs pcp – and sales of $424.7M, which was down -2.2% vs pcp.
Since that result, the price has struggled to go back above $6/sh. It’s arguably been under pressure for years.
The company’s most recent half-yearly report, released in February this year, showed a somewhat better story though.
There: Sales were $471M, up 2.9% vs pcp (1HFY24), and gross profits of $196.3M.
Good on paper, but it’s NPAT that’s worth looking at – The Reject Shop posted an NPAT of $16.4M in 1HFY25, just $1M higher than its February 2022 results.
Whether or not Dollarama – which is listed on the Canadian TSX – is more interested in the Australian proposition rather than a full-on global rollout at all costs remains to be seen. Dollarama is a 60% interest holder in Dollarcity, another low-price value chain in Latin America.
(It also helps the Canadian dollar is slightly stronger than the Aussie; one Canadian dollar buys A$1.11 at the time of writing.)
“Attracting an offer from Dollarama, a recognised leader in the value retail market, is testament to both the meaningful improvement that our incredible team has made to our business over the past few years as well as the significant growth potential that exists for The Reject Shop,” TRS Chair Steven Fisher said.
The keyword there is ‘growth potential’ – a potential the Board of TRS so far hasn’t been able to unlock. But whether TRS has been struggling to come back to 2022 highs because of management acumen, or because of consumer behaviour, remains up for debate.
(I can’t remember the last time I stepped foot in a Reject Shop – though, in the cost of living crisis, it’s not hard to see why 1HFY25 sales have been steady.)
Still, 1HFY25 sales aren’t dramatically higher than that clocked in 2022, either. So it will definitely be a story of whether or not Dollarama can turn the ship around.
That said: Its latest half-year earnings showed a profit margin of 41.6%. That, most probably, is what Dollarama has its eyes on. Also worth considering is that Dollarama Inc., on the TSX, is up +280% over the last five years.
The question now is if Dollarama can translate that success into the Australian context.
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The Reject Shop’s largest shareholder, Kin Group – it holds a fifth of TRS – is definitely keen to get its money’s worth. It’s putting all of its votes behind the deal, and TRS has suggested shareholders all vote the same.
TRS last traded at $6.60/sh after the acquisition news broke.
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