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Myer Revamps Management But Why Now?

Australia | Mar 03 2015

This story features MYER HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MYR

-Earnings remain weak
-Substantial investment needed
-Time required to turn Myer around

 

By Eva Brocklehurst

Myer ((MYR)) is revamping its top team. Long-time CEO and managing director, Bernie Brookes, will depart immediately, to be replaced by Richard Umbers, who joined Myer last year. Daniel Bracken, who also joined Myer last September, is appointed deputy CEO. In an unrelated event, chief financial officer, Mark Ashby will depart in May to take up a position in the US. His replacement is pending.

JP Morgan observes the management moves have come sooner than expected, as a strategic review is underway already and a longer period for execution was expected before changes to management were considered. As is the case with such transitions a re-basing of earnings is possible, although not certain. Earnings have been weak for some time and a $35-50m additional investment in FY15 was already signalled as part of the strategic plan.

JP Morgan suspects further downside to FY16 and FY17 earnings. Moreover, the broker does not consider replacing management is a panacea for declining profitability. Headwinds still exist as the company struggles to find its position on the quality scale. Discount department stores are increasingly making inroads in fashion and soft goods at the low end while David Jones is providing competition at the high end, as it increases its private label offer. JP Morgan also observes the entry of international specialty retailers into the Australian market are putting price and logistics pressure on Myer.

The timing of the departures, two weeks ahead of the first half results announcement, has raised some eyebrows at Credit Suisse. The broker acknowledges the chairman's confirmation that the performance of the company remains in line with consensus expectations. This suggests any underperformance on short-term expectations, if it exists, is not material. There were few clues about the strategy that is being embarked on, although the broker expects the company will reconsider the breadth and size of its store network and accelerate changes to its product range as well as broaden e-commerce capability.

Credit Suisse contemplates a potential $200m rights issue or an underwriting of the dividend in order to facilitate change. While the opportunity to bring forward structural change is never better than when a CEO departs, Credit Suisse acknowledges the uncertainty and downgrades to Neutral from Outperform, suggesting shareholders should be aware of the potential for a capital raising.

To UBS, the chairman's rationale, that the current CEO needed to be the one who could lead the group to completion of the review, is reasonable but the lack of new guidance is a niggle. Previous guidance provided by Bernie Brookes was soft, and the lack of further advice could be taken as a sign guidance will not be met. UBS had expected Bernie Brooks would remain at least until the first half results were known. Changes must be afoot and therefore uncertainty prevails, the broker reasons.

A revitalised management team may be the catalyst that is needed for significant investment in the brand, in Deutsche Bank's view. The new team have solid credentials but the broker would have also found merit in the appointment of a CEO with more global department store experience. Deutsche Bank believes substantial investment is needed in the brand and the strategy could take years to turn the business around. Earnings forecasts are downgraded to reflect this view, with some benefits expected from FY17.

Macquarie considers the dual departures ill-timed. The broker believes the appointment of Richard Umbers is a significant move, as his department store experience is limited to his brief time at Myer. Prior to this he held a senior logistics position at Australia Post and, earlier, general manager roles at Woolworths ((WOW)) and Aldi. Macquarie also suspects, with the state of Myer's balance sheet, equity capital may be required to fund investments emanating from the strategic review. A lack of an earnings update reduces the risk of upside surprise at the first half result. This is despite evidence of favourable department store trading conditions in January. Macquarie finds little value in the stock at the current price and retains an Underperform rating.

While the changes at the top may signal near-term earnings downside, investment in the business has to be uppermost in the company's strategy, regardless, in Citi's opinion.Time will only tell but the broker notes, compared with other major department stores, Myer is trading at a large discount and may need to shut stores and overhaul its product mix.

The change at the top should accelerate the pace of change in strategy and at first blush Morgan Stanley maintains an Overweight rating. The newcomers bring complimentary but differing experience to Myer, although the broker acknowledges making the changes two weeks out from the results is odd. Still, Myer would have an obligation to update the market at this point if profits were wildly different to consensus views, so Morgan Stanley suspects the announcement could actually be a confirmation of expectations.

FNArena's database has one Buy, five Hold and two Sell ratings. Consensus target is $1.85, suggesting 10% upside to the last share price. Targets range from $1.50 (UBS) to $2.50 (Morgan Stanley) The dividend yield on FY15 and FY16 forecasts is 7.5% and 7.7% respectively.
 

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