Australia | Sep 13 2016
This story features MYER HOLDINGS LIMITED. For more info SHARE ANALYSIS: MYR
Brokers expect Myer's upcoming FY16 results will reveal a contraction in margins but they remain modestly positive about sales growth and momentum of the New Myer strategy.
-Like-for-like sales growth needs to be seen as sustainable to generate investor confidence
-Reduction in private labels and concessions playing a greater part in the store's footprint
-Re-opening of Warringah Mall store to showcase New Myer strategy
By Eva Brocklehurst
Competitive and structural pressures may be buffetting Myer ((MYR)) but the department store is progressing with its “New Myer” strategy. The company will re-open its Warringah Mall store in October, showcasing an increased emphasis on concessions amid a more boutique footprint. The company's upcoming FY16 results are likely to reveal a contraction in margins but brokers are modestly positive about sales growth and the likelihood momentum will continue.
Citi expects profit to be slightly above guidance, with net profit guided at $66-72m. The broker expects gross margins will have declined by 140 basis points in the second half, largely because of the exit of private labels. A warmer start to winter is one of the risks the broker acknowledges, noting stock clearances emerged a week earlier than in the prior year.
Myer has expanded its floor space allocated to concessions and sales in these segments are expected rise accordingly. Progress is being made on costs and Citi forecasts cash costs to fall 130 basis points, through savings at head office, procurement benefits and lower wage inflation. The stock has flatlined since the third quarter sales result in May and the broker accepts, in order to generate further investor confidence, like-for-like sales growth will need to be seen as sustainable.
While competitive pressures are continuing unabated, Deutsche Bank still believes the new initiatives and the retail environment are broadly supportive of Myer. FY16 gross margins probably were under pressure from FX movements and inventory clearance in the winter, and the mix-shift to concessions
This broker also expects margins to decline but EBIT (earnings before interest and tax) margins should hold up better than gross margins because costs are being held down. Sales growth remains positive but Deutsche Bank believes that at some point costs will start growing again. New initiatives are observed as providing some support and consumer demand remains reasonable.
Of interest to Ord Minnett is the extent to which like-for-like sales growth continues. The broker will also monitor the implementation of the New Myer strategy. Sales growth is expected to remain strong in the fourth quarter at around 3.8%, with a greater part being played by concessions amid store closures and targeted investments in key stores.
The broker flags the fact that the growth in concessions, with reduced private labels, and lower costs via productivity changes and procurement, will change the shape of the profit and loss statement. Ord Minnett forecasts gross margins to fall 186 basis points to 38.5%.
The main issues for the broker are sustainability of sales growth, the change in product mix and the competitive intensity arising from both incumbents and new entrants. Ord Minnett would also look for any disclosure of a relationship with UK department store John Lewis.
Credit Suisse believes Myer's strategy is being under-appreciated by the market. The re-opening of Warringah Mall store is expected to deliver $5m in incremental EBIT. The store has been closed since January and refurbishment is part of the re-development of the mall.
Structural headwinds are well documented for department stores and the broker expects the format to continue to decline as a segment of retailing. Nevertheless, Myer is undertaking improvements from a very low base and, with a largely fixed cost base, it is considered highly leveraged to even a moderate improvement in sales revenue.
FNArena's database shows three Buy and four Hold ratings. The consensus target is $1.33, suggesting 3.2% upside to the last share price. Targets range from $1.16 (Macquarie) to $1.56 (Credit Suisse). The dividend yield on FY16 and FY17 forecasts is 4.7% and 4.5% respectively.
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