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The lingering impact of the pandemic on Australia's CBD markets has hit home for The Reject Shop (ASX: TRS) with a modest sales increase across its broader portfolio being dragged down by stores in the inner-city and large shopping centres.
The company, which operates 337 sites, says stores in metropolitan CBD locations and major retail centres are trading well below pre-COVID-19 levels.
The 47 stores in these locations delivered a 12 per cent drop in sales from the same period in FY19, while the balance of its stores have seen a 0.9 per cent increase in sales.
The overall result is a drop in sales of 1.4 per cent for The Reject Shop for the 48 weeks to the end of May compared with the same period last year.
With many of the troubled stores facing lease renewals, The Reject Shop says it will be seeking to renegotiate lease terms and it hasn't ruled out closing underperforming stores if it can't reach a suitable agreement with landlords.
The latest update follows the company's warning during its half-year result announcement in February that sales in January and February suffered due to lockdowns in Brisbane, Perth and Victoria.
The Reject Shop says it also continues to face challenges with its international supply chain, leading to higher costs in the second half.
Despite forecasting a rise in EBIT, the news sent The Reject Shop shares sharply lower in early trade, with a fall of more than 10 per cent.
The company is forecasting full-year sales of between $776 million and $778 million in FY21, down from $820.6 million in FY20. At best, this forecast is 5.1 per cent lower than the previous year.
"It should be noted that trading conditions remain unpredictable during June, particularly in light of the current COVID-19 lockdown in Melbourne and COVID-19-related restrictions in regional Victoria," says the company.
EBIT is expected to be in the range of $8 million and $10 million, well up from $4.5 million last financial year.
Although there is a risk of some inner-urban stores closing, The Reject Shop is still looking to expand its footprint.
"The company continues to look for new locations, particularly in regional Australia, where it can more conveniently serve more Australians," it says.
The group expanded store numbers in the latest half by four to 359.
"The company expects to progressively open a further two stores in June and nine stores during the first quarter of FY22."
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