Behind Solomon’s stake in Myer

myerNothing quite stirs the retail rumour mill like a Solomon Lew investment play.

The wily investor and retailer has yet again set the industry buzzing with his latest foray, a $101.3 million investment in the lumbering Myer department store group.

Much of the intrigue surrounds the timing of the move, which saw Lew’s Premier Investments secure what it described as “a strategic investment” of 10.77 per cent in Myer.

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Myer had no knowledge of the on market share acquisition until Premier Investments confirmed its investment, informing the department store group and the market that it does not currently intend to make a takeover bid.

Lew’s move coincides with whispers of interest by two potential international buyers who have run the metrics on a Myer takeover, one of them understood to be the listed South African retailer, Woolworths.

Woolworths owns David Jones and Country Road and has recently restructured its Australian operations to integrate the two business channels.

The market whispers suggest Woolworths has dusted off the Myer merger proposal that was a precursor to its $2 billion plus bid for David Jones in 2014.

Myer had approached David Jones the previous year with a merger proposal that was not seriously entertained by David Jones management, but which outlined synergies and the opportunities that would be created by bringing the two department stores together.

In part, the proposal was a defensive play to fortify the two chains against the global retailers coming into the market, but it was also an admission that Myer’s turnaround strategy was not delivering the expected results.

Once Woolworths’ takeover bid for David Jones succeeded, albeit not without some clever manoeuvring by Solomon Lew, Myer reset its course under a new managing director, Richard Umbers.

MyerBourkestreetPremier Investments’ share purchase in Myer arguably has one of two motives, a potential future takeover bid or a defensive play to protect his brands in the event another party launches a bid.

It would seem most unlikely that Lew has taken a passive and patient stake in Myer for the dividend returns.

Despite now being the largest single shareholder, Myer has already ruled out a return to the board table for Lew, who was chairman, executive chairman, vice-chairman and a director of Coles Myer over 17 years until 2002.

Being forced off the Myer board was a bitter pill for Lew and, in some respects, left him with some unfinished business.

Myer may not be able to keep him from the boardroom if Premier Investments lifts its holding in the company closer to 20 per cent and, in any event, his experience might be very useful as the chain tries to find a sustainable growth strategy.

No turnaround for Myer

Myer is claiming satisfactory progress with its turnaround strategies, yet sales declined by 0.6 per cent for the first half of the current financial year to $1.78 billion.

Second quarter revenues, which included Christmas and new year sales, fell by 1.3 per cent while, on a comparable store basis, allowing for store closures, Myer barely bettered the 2016 half result by 0.3 per cent this year.

Myer claimed its sales momentum in the half was slowed by its strategy to reduce discounting, believing that it is counterintuitive for a premium, top end, full service department store to rely heavily on promotional pricing.

Myer did record a 5.3 per cent increase in net earnings to $62.8 million for the six months to 28th January 2017, but the improved profit result was due to reduced costs in the business rather than trading.

Despite the optimism and new initiatives such as the alignment with the British department store chain, John Lewis, the trading results were hardly positive enough to encourage Lew to acquire such a large stake in Myer at this time.

solomon-lew

Lew could well have bought into Myer at a lower price

More bang for Lew’s buck

Indeed, Lew could well have bought into Myer at a lower price and with the backing of most institutional investors and analysts back in 2014 when Woolworths captured David Jones.

Lew made a very handy windfall profit in 2014 on what was effectively a blocking stake in David Jones of close to 10  per cent, reportedly with options available to secure control over a further 10 per cent of the issued scrip.

His purchase of David Jones shares after Woolworths announced its takeover bid allowed Lew to extract a tidy profit on that stake but, significantly, to also pocket $213 million for his 11.8 per cent stake in Country Road.

Lew had refused to exit his shareholding in Country Road after it was acquired by Woolworths and was a constant critic of the South African owners over a 17-year period.

In the 2014 deal, Lew was paid around five times the value of his Country Road stake by Woolworths in its desperation to remove him from the David Jones acquisition process.

At the time, with Umbers a new and untried hand at Myer and with a team of executives with department store management experience in his Premier Retail businesses, investors thought Lew might make a move on Myer.

However, despite indicating frequently that he is on the lookout for suitable acquisitions, Lew passed over the opportunity to buy Myer and focused his executive team, led by former David Jones managing director, Mark McInnes, on the Premier Retail brand portfolio.

Premier Retail’s fashion brands have not exactly set the world alight in the past two years, but the company has generated strong sales growth through its expansion of stationery brand Smiggle in Australasia and the United Kingdom.

Lew has also had some better returns from his other retail investments, including a stake in Zara that is held through his son, Peter Lew’s International Brand Management.

A long affair with Myer

While Lew has been successful in retailing, wholesaling and investing, Myer has always been his most important alignment.

Lew joined Myer’s shareholder lists in 1983 with a $38 million parcel of shares and went on to join the board of Coles Myer.

Myer gave Lew a prominence in the business community that his other investments could not and it was also crucial to the success of many of his other businesses, particularly his wholesale operations through Voyager Distribution.

Passing on Myer in 2014 suggests that Lew is unlikely to pursue a takeover of the department store chain on the back of the $101 million share acquisition, although it seems he is prepared to continue to add to his current stake with periodic purchases of Myer scrip.

It is much more likely that Lew wants to have influence in the outcome of any takeover bid by another party and perhaps he savours another round or two with Woolworths!

However, the key reason Lew would want to influence events if a suitor for Myer did emerge would be to secure his brands and supply agreements with Myer.

The defensive strategy has become more critical with other major retailers direct sourcing merchandise in Asia and with Woolworths introducing more of its own brands to David Jones.

Lew would not want to miss out on the label shuffling by Myer, especially under yet another review of its fashion ranges that has been prompted by tepid sales and losses on headline Myer brand investments in Topshop, Topman and Sass & Bide.

While financial analysts are scratching their heads over why Lew would tie up more than $100 million in a business which is yet to prove it can generate sustainable sales and earnings growth, the defence strategy makes sense and, indeed, over the years Lew has actually profited handsomely from defensive plays.

In the meantime, Myer might do well to consider how it could capitalise on Lew’s new enthusiasm for their stock.

Concession sales showed reasonably good growth for the department store in the first half, but Myer’s apparel sales are sluggish and facing increasing competition from nimble international retailers.

Lew understands international brands, having been a local partner in several successful international clothing and footwear brands and also understands the concession business upon which Myer is now so heavily reliant.

While there may still be angst over third party transactions (the issue that felled Lew as Myer chairman back in 2002), the department store chain could do worse than bringing him back onto the board and tapping into his experience, industry knowledge and intuitive strategic skills.

At around $1.20 a share, Myer’s value is a long way south of the $4.10 price it floated at in 2009 albeit better than it has been at various times over the past two years.

The turnaround strategy has reversed some of the strategies initiated under the private equity owners prior to its listing on the Australian Stock Exchange, including new store development, but there is still no ringing endorsement in sales and earnings for the latest plan.

With international retailers and online vendors trying to lure away customers, Myer could do a lot worse than have Lew within its ranks as a potentially restive shareholder as he was for Woolworths’ Country Road business.

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