Revenue Doldrums Beset Myer

This story features MYER HOLDINGS LIMITED. For more info SHARE ANALYSIS: MYR

Department store Myer is hampered by a weak consumer outlook and having trouble growing revenue. The arrival of Amazon in Australia is only expected to aggravate the situation.

-Increasingly reliant on cost reductions to stem losses
-Business appears unable to grow top line without sacrificing margin
-Brokers suggest targets need to be re-set
 

By Eva Brocklehurst

Department store Myer ((MYR)) is beset by a weak consumer outlook and the arrival of Amazon in Australia, with its strong online presence, is expected to aggravate the situation.

Cost reductions may provide some momentum in the near-term, but brokers suggest there is only so much that can be done in this regard. Myer reported a disappointing FY17 result, with sales declining -1.4%, driven in part by the closure of three stores. Another four stores will be closed over FY18-20.

UBS downgrades FY18-20 earnings estimates by -6-7% to reflect the company's statement that FY18 conditions are below expectations. While commentary implies comfort with FY18 consensus net profit estimates of around $66m, the broker envisages downside risk as top-line pressures intensify. UBS factors in three store closures across FY19-20.

Myer is now two years into a five-year turnaround strategy and has missed four out of its five medium-term targets. UBS acknowledges cost reductions should continue to soften the blow but pressures from Amazon and international fashion entrants will inhibit the company's ability to sustain growth in earnings. This is aggravated by the store chain's long and expensive lease tail. UBS retains a Sell rating.

Credit Suisse suggests the ongoing shift in customer shopping preferences is sitting uncomfortably with the company's large store incumbency and talk of resilience appears more hopeful than a reflection of reality. There is scant evidence that core stores are growing sales revenue and, with no compelling reason for revenue to improve, the broker expects earnings will continue to decline.

Sales Vs Margin

Aside from dealing with Amazon, Deutsche Bank explains Myer's conundrum thus: some years ago a formula was employed for growing gross margins by increasing the penetration of exclusive brands, but this came at the expense of sales and likely drove customers away from the format.

The subsequent new strategy was more sensible, with a focus on ranges customers wanted to buy, more discipline on discounting and bringing some theatre back to stores. Top-line sales improved as a result but this came at the expense of margin. The broker fears a renewed emphasis on exclusive brands may raise the old problem and suspects the business cannot grow the top line while maintaining gross margin.

Deutsche Bank suggests potential corporate interest is the main offset to the risks. In FY19 and beyond the broker expects earnings will be flat or slightly lower with continued mix-related gross margin pressure. This could be somewhat offset by reduced costs from space reductions and efficiency measures.

While recognising the productivity benefits that should come with closures, Morgan Stanley is not confident the sales will transfer to other stores and retains little optimism for future sales growth. Gross margins continue to decline, the broker observes, although cost controls and a shift towards concession sales in the mix helped stem the rate of decline.

Morgan Stanley's confidence in the company's sales strategy continues to wane as target metrics appear increasingly hard to achieve. As online and foreign retailers pressure sales, the broker believes the multiple currently factored into the stock adequately reflects a business that is increasingly relying on cost reductions to stem its losses.

Re-setting Targets

Morgan Stanley awaits the November 1 strategy briefing, suggesting the company does need to re-set its targets and retaining an Equal-weight rating based on the corporate appeal in the stock.

Citi agrees it is unrealistic to continue to target a 20% uplift in sales per square metre, 3% sales growth and 15% return on funds employed. It remains possible for operating earnings (EBITDA) growth to exceed sales growth off the low base, but the broker does not expect this to be achieved until FY19. Citi takes heart in the fact the company is actively addressing its cost base and trying to find the balance between gross margin and like-for-like sales growth.

Cost reductions through personnel are largely out of the way and Citi expects benefits from store closures and back-office rationalisation will provide support for earnings. Risk is considered priced in at current levels. Nevertheless, while sales growth is unlikely in the short term the broker agrees this is essential to stabilise the business.

The consensus target on FNArena's database is $0.83, suggesting 18.8% upside to the last share price. Targets range from $0.65 (UBS) to $0.95 (Citi). There are three Sell, three Hold and one Buy (Citi) ratings.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms