Department stores slash and burn their way to profit

Myer surprised some industry observers with a modest $24.5 million net profit, hardly a resounding affirmation of great progress on the latest turnaround strategy but a profit nonetheless.

The result certainly looked better than the $486 million loss in the 2018 full financial year, a result that included massive writedowns on the value of the department store.

The FY19 profit was largely the result of cost-cutting and reducing floorspace rather than reigniting sales or boosting its customer base.

Myer remains very much a work in progress with plans to reduce its floorspace through store closures or surrender trading area in retained stores by up to 10 per cent in the relatively short term.

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The retailer is already due to close part of its Myer Melbourne flagship floorspace and to exit Hornsby in Sydney and at least some of the trading space that has been used in the past two years as discount clearance centres.

Myer sales fell 3.5 per cent in FY19 and concessions sales, which had been one of the positive growth metrics in recent years, fell 6.4 per cent.

The Myer result emphasises the significant challenge in the department store category that will see Debenhams close and all of the major retail chains, with the exception of Kmart, shed floorspace as they try to reduce costs and boost productivity.

David Jones, the department store group owned by South African retailer Woolworths, will reduce its retail trading space, closing stores and scaling back the total selling space in some locations. The chain, which has claimed retailing is in a recession in Australia, posted a $37 million profit for the full financial year to June 2019, down from $64 million in FY18.

The retailer’s sales were down 0.8 per cent to $2.2 billion in FY19, despite significant investment in food as a foot traffic-, sales- and earnings-generator for stores.

The result followed a writedown of $437 million on the value of the David Jones chain, bringing to $1.1 billion the total value slashed from the asset in the past two years.

Reacting to the latest results and the outlook for the David Jones chain going forward, Woolworths plans to aggressively cut back its trading footprint which currently includes 47 Australian stores.

It plans to exit “marginal or undesirable” leases for David Jones and its Country Road specialty group. For the department stores, Woolworths expects to reduce its trading floorspace by 20 per cent by 2026.

The store network of the Target discount department store chain will be scaled back by around 20 per cent over the next five years, with many of those outlets expected to be the smaller country stores.

Target has continued to bleed sales, with comparable sales for FY19 down 0.8 per cent after allowing for store closures. The total sales drop for the year at Target was 1.5 per cent, and although Ian Bailey, MD for the Kmart and Target chains, claims the struggling chain will post a full-year profit, earnings have been adversely impacted by the revenue decline and restructuring costs.

As well as the store network rationalisation, Bailey says the chain needs to do more work on its repositioning, especially in womenswear, and to improve the customer experience in stores.

Big W, which is owned by Australian grocery chain Woolworths, faces the same challenges as Target.

The other department store group currently reviewing its future directions – and potentially its ownership – is Harris Scarfe and stablemate Best and Less, both owned by Geenlit Brands.

Greenlit Brands is a subsidiary of the troubled South African Steinhoff International retailing and manufacturing conglomerate. In Australia, it also owns Fantastic Furniture, Snooze, Freedom Furniture and Plush.

The company has examined an exit of some or all of the Australian business from Steinhoff International via a listing on the Australian Securities Exchange or an equity partner investment. It has canvassed, but has found little enthusiasm from potential buyers of Harris Scarfe or Best & Less.

A retail strategy developed by Greenlit Brands to improve sales and earnings from Harris Scarfe has been scuttled with the decision to end a licence agreement with UK department store group Debenhams for its bricks-and-mortar stores and branded merchandise ranges.

Greenlit Brands now has to reassess the future of its general merchandise division and to determine whether it should focus on its furniture brands.

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