The Reject Shop blames profit warning on interest rates, but experts warn more pain to come

The Reject Shop, which just a few months ago was named one of the best performing retail outlets in the country eyeing major expansion, has blamed a shock profit downgrade on higher interest rates, but experts say the pain will continue.

Brian Walker, chief executive of consultancy firm Retail Doctor, says the result is an example of just how soft the market has become.

“When you look at the Reject Shop, which is a very good discount operator constantly under pressure, and when they are feeling the pinch, it’s an indicator of just how soft things are in retail,” he says.

These comments come after CommSec economist Craig James pointed out yesterday that even though unemployment has fallen to 5.2% and there is upward pressure on wages, consumer spending is still tight and will be so for some time.

“While it’s good news that plenty of Aussies have jobs, now the focus will need to shift to Australia’s awful productivity growth. More people are getting jobs but plenty of us must also be working fewer hours and putting out less output,” he said yesterday.

“Employment in the biggest demographic (35-44 years) has only lifted by 1.3% over the past two years or 32,000 people, thus constraining consumer spending.”

And that restraint has finally begun to hit even the most confident of retailers.

The Reject Shop shares plummeted 25% yesterday after managing director Chris Bryce told shareholders that net profit after tax is set to come in between $21-22 million, down from the previous forecast of $26-26.5 million.

“Since the last interest rate rise, comparable store sales for November, and December to date, have been negative, resulting in overall sales being significantly below expectations,” he said, adding that the last rate rise was “completely unexpected”.

The company’s shares fell over 25% to a year low of $12.72 yesterday, although it had improved later in the morning to $13.48.

This is a significant shift from the Reject Shop’s comparatively cosy position back in July. At that time the 200th store ad just opened, and net profit after tax grew by 22.9% to $23.9 million over the year. And although like-for-like sales were up by just 1%, total sales were up over 14% to $80.8 million.

Such a pessimistic forecast does little to reassure other retailers who are suffering through one of the weakest Christmas trading seasons in recent times. Walker says that the results confirm how soft the market has actually become.

“This is not a market indicative for spending. Funnily enough, I still expect us to get a reasonably good Christmas, but we also have to think about other things. For instance, the impact of online trading… and the growth of competition from other discount operators like Aldi.”

Walker’s comments come as Morgan Stanley analyst Thomas Kierath told The Australian that if online penetration reaches the current US level by 2015, then internet sales could take away 22% of incremental growth in Australian retail sales.

But Walker says the real issue is how interest rates are affecting consumer confidence.

“But funnily enough, if you look at the recent figures from Dun & Bradstreet, it does indicate that from March onwards we could see a return to confidence. There are some mixed messages… but retail spending is certainly feeling the effects and discretionary retail is being hit hard.”