Brookes: write downs on the horizon

BernieBrookesFormer Myer CEO Bernie Brookes believes it is “inevitable” that Australian retailers will need to write down millions in intangibles from their books amid heightened scrutiny from auditors and shareholders.

Speaking to Inside Retail in the wake of a decision by David Jones parent Woolworths Holdings to write off $713 million from the value of the upmarket department store last week, Brookes said that many local retailers are carrying valuations that reflect an out-of-date retail landscape.

“A lot of retailers have got very high values for brands and company intangibles on their balance sheets,” Brookes said.

“[It’s] inevitable that multiple retailers, not only in Australia, but around the world, will have to write down. The value they’ve got in their books was [done] when their business was predominately bricks-and-mortar with good footfall.

“Under the heavier and continued scrutiny of auditors and shareholders it is diligent…to ensure the value you have for intangible assets on your books is correct,” he added.

Myer, where Brookes was CEO from 2006-15, has come under increasing pressure to re-assess the value of its own intangible assets recently, which were valued at $986 million in its 2017 annual report and far exceed its market capitalisation of $514 million.

The department store will conduct a routine assessment of the value of its intangible assets as part of its interim result for FY18 in March.

Woolworths Holdings’ decision to write off around 34 per cent of the $2.1 billion it paid for David Jones in 2014 has piled yet more scrutiny on its ASX-listed rival, which flagged a management restructure earlier this month as part of its ongoing effort to turn around the struggling business.

Myer said it is shedding even more support office staff as part of the shake-up, while current CEO Richard Umbers is also investing heavily in digital initiatives, closing stores and refining product range to reflect broader-based changes in shopping habits.

Will shareholders have the patience?

Brookes, referencing department stores, discount department stores and specialty retailers, believes the changes being implemented by established local brands has put them on the right track. However, whether shareholders are wiling to weather the storm remains an open question.

“Retailers are on a train track moving in the right direction, but the key question is whether shareholders and shareholder activists have the patience for them to effectively move towards that right direction,” Brookes said.

“This will be another year where it will continue to get harder for traditional bricks-and-mortar retailers…and that will continue to cause a fallout in brands and in retail.”

Myer has had shareholder problems of its own in recent months after Premier Investments chairman Solomon Lew purchased a 10.8 per cent stake in the business last year.

Since then, Lew has been publicly critical of the department store’s board, including new chairman Garry Hounsell, whose appointment he campaigned against at Myer’s AGM last year.

Lew is now planning to call an extraordinary general meeting later this year to put his own board nominees before a shareholder vote.

Myer’s shares are now trading at around 62c, 84 per cent below the initial listing price of $4.10 when Brookes oversaw a float for the business in 2009.

But despite the apparent fall from grace many prominent retailers have experienced in recent years, Brookes does see a future for traditional bricks-and-mortar brands, predicting that many will transition to smaller and more digitally-enabled store footprints that rely much more heavily on online sales as a proportion of overall revenue.

“They’ve got to have a much smaller footprint, they’ve got to be much more attractive from a digital perspective and they need a much better reason for people to visit their stores,” Brookes said

That’s bad news for landlords, who he said face a “fairly ugly picture”, but for those retailers able to make the changes, there will be a “rebirth”.

“There will still be animals that survive, but a bit like Darwin’s theory, they will continue to thrive in a different format and develop significantly.

“Retailers will be rebirthed, but under a different and much smaller model,” Brookes contended.

Bernie Brookes will be a keynote speaker at Inside Retail Live in Melbourne, 28 February – 2 March 2018. For more details, visit: insideretail.live

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