Small Caps | Sep 13 2018
Myer has renewed its focus on a smaller store footprint, online growth and exclusive brands, yet brokers are sceptical the business can make inroads against intense competition.
-Sourcing benefits for Myer exclusive brands and reduced discounting
-Yet risks to the top line are now higher
-New debt facility, yet confidence remains a constraint
By Eva Brocklehurst
Some improvement for challenged retailer Myer ((MYR)) was evident in the FY18 results and the new CEO, John King, has announced a reinvigorated strategy to focus on online growth, a smaller footprint and an improved organisational structure.
Gross margins surprised brokers to the upside, increasing 105 basis points in the second half. Sourcing benefits for Myer exclusive brands were cited, as well as reduced markdowns. The improvement in gross margins was primarily from favourable weather, that resulted in less discounting, so Citi does not expect the same factors to be repeated in FY19.
Fourth quarter sales were better, as the decline over the second half of -2.4% was less than the third quarter's decline of -3.1%, and the first half decline of -3.0%. Management suggests fourth quarter momentum is continuing into early FY19.
Ord Minnett is confident the new strategy will provide profit growth, despite near-term weakness in sales. Sales are to shift to Myer exclusive brands from concessions, supporting gross margins. Yet the broker also suggests the company appears more willing to engage with the "discount value" customer and less with the "aspirational" customer. Ord Minnett upgrades to Hold from Lighten, believing the risk/reward ratio no longer justifies the prior rating.
UBS takes heart in several positives in the result, including improving like-for-like sales, relaxed debt covenants and better gross margins, although remains sceptical about the ability to reinvigorate the top line. As balance sheet pressure has been alleviated for now, UBS upgrades to Neutral from Sell.
Myer will struggle to grow earnings, the broker asserts, because of competition, while cost reductions will come to an end. The business has too much space in a structurally challenged industry and is also constrained in its ability to rationalise this space, given the $2.5m 13-year lease tail. Nevertheless the stock reflects the risks, UBS believes.
Myer has pulled back on discounting but Citi suggests caution should prevail regarding any retailer trying to unwind promotional activity, given customers are accustomed to buying on promotion.
Management has stressed the importance of profitable sales, which Macquarie agrees is a sensible sounding strategy, yet with reduced markdowns and new focus on exclusive brands the risks to the top line are now higher. A focus on Myer exclusive brands has been a feature of previous strategies and may be insufficient to drive foot traffic, in the broker's view.
The category is already highly competitive and challenging and Macquarie envisages risks skewed to the downside, with cost savings likely to become harder to achieve. Still, there is some, albeit modest, potential for corporate activity.