Myer unveils massive loss on half a billion write down

MyerMyer has unveiled a $476 million half-year loss, announcing a $515 million impairment on the carrying value of its goodwill and brand name on Wednesday morning.

Executive chairman Garry Hounsell has flagged an increased focus on exclusivity, service and price in a bid to combat the embattled department store’s ailing performance.

Excluding $9.7 million in implementation costs and the write down, Myer booked a 36 per cent decline in its net profit after tax to $40.1 million, which was at the higher end of the guidance it provided in February.

As questions mount over whether the write down may leave Myer at risk of breaching its lenders conditions, the company today looked to reassure the market, saying that it remains within all of its financing covenants and is undertaking negotiations to re-finance an existing facility that’s due to expire in August 2019.

Compounding Myer’s woes was a 3.6 per cent decline in total sales to $1.71 billion in the first half, while comparable sales decreased by 3 per cent.

Top line performance worsened in the second quarter, down 3.6 per cent on a comparable basis; compared to a 2.1 per cent decline in Q1.

Earnings before interest, tax, depreciation and amortisation decreased by 23.8 per cent to $108.3 million in the half ended 27 January.

Hounsell, who stepped in to lead the business after former chief executive Richard Umbers was shown the door in February, said the result was “unsatisfactory” and reflected a “failure to respond appropriately to the heightened competitive environment prior to Christmas.”

“The execution of strategic initiatives could have been better managed, for example, some elements of the strategy, which targeted a new high value customer were rolled out too quickly and didn’t balance enough attention on Myer’s traditional customer base, adversely impacting profitability,” he said.

Amid questions about Myer’s strategy the former Spotless Group chairman conceded that he’s not “one of the world’s great retailers”, but said that he does know “how to make money” and would be focusing on the bottom line in his role as a care-taker for the business while a new chief executive is found.

Myer has already interviewed several “high calibre” candidates for the new role and a search remains underway.

“We already have a strong list of candidates … I will make an announcement on this at the appropriate time,” Hounsell said.

‘Aggressive trading’

Despite lacking a CEO, Hounsell moved to reassure the market that change is underway within the struggling business, saying that he’s been pushing the Myer team to “trade the business more aggressively” since starting, and is in active discussions with landlords on reducing overall occupancy costs.

“We’re trying to negotiate various things with [our landlords], we look at the whole portfolio … I have a series of meetings coming up in the next few weeks,” Hounsell said.

Myer’s store closure plans are currently under review, but Hounsell said it would ultimately a matter for Myer’s new CEO.

Myer has also kicked off a renewed focus on product, price and customer service in his first month leading the day-to-day operations of the business, outlining an expectation that his plan will “re-engage” Myer’s traditional customer base.

The shift sparked questions from analysts about whether Hounsell was still committed to the New Myer strategy, which was not mentioned once in its half-year release to the ASX on Wednesday morning.

Hounsell said that the New Myer strategy, which has characterised the department store’s turnaround for several years, was sound, but signalled that an incoming CEO may make further changes.

“We moved into areas of the New Myer strategy too quickly … we’re now re-looking at that,” Hounsell said.

“The strategy and the new strategy is for the new CEO, its not my job I’m in a caretaker role and that’s … purely to drive profitability for our shareholders,” he later said.

Hounsell said he’s “elevated” Myer’s focus on exclusive brands across all categories and the business will increasingly focus on setting itself apart from competitors in coming months with the launch of a new marketing push called “Only at Myer”.

“You will hear the term only at Myer more,” he said. “Our customers will know that our range is unique, different, compelling and only available at Myer.”

Myer will also be increasing its focus on staff training to address concerns about the level of service being provided in its stores, as well as adjusting its pricing strategy  to reflect its renewed focus on value.

Online will be continuing its investment in online, signalling an expansion of its new marketplace offer after e-commerce after becoming Myer’s third biggest store during the half.

Myer’s online sales increased by 48.9 per cent in the first half to $105.2 million.

Bouyed by the growth Hounsell plans to seperate the Myer One loyalty business from Myer’s online operation to facilitate ongoing investment in both business units.

Second half improvement

The department store provided no specific second-half guidance, but said that sales have improved in the first seven weeks of the second-half, following investments in price.

Price investment signals headwinds for Myer’s margins in the second-half though and analysts outlined concern that earnings may suffer as a result of continued discounting.

Myer’s  first half cost of doing business was relatively flat, decreasing by .3 per cent to $537.1 million, although operating gross profit margins declined by 73 basis points to 37.53 per cent – impacted by increased shrinkage, discounting and lower rebates from suppliers.

Myer’s total cost of doing business declined by .3 per cent, but increased as a percentage of sales.

Operating gross profit margins declined by 73 basis points to 37.53 per cent – impacted by increased shrinkage, discounting and lower rebates from suppliers.

Write down scrutinised 

Myer’s new chief financial officer Nigel Chadwick moved to curtail mounting concerns over Myer’s debt facilities in the wake of the write down after flagging “orderly” negotiations on a new debt facility.

“We firmly believe there’s sufficient headroom to see us through to our next refinancing,” chief financial officer Nigel Chadwick said.

Myer’s $515 million write-down still leaves the value of Myer’s intangibles significantly higher than its market capitalisation, but Chadwick said auditors had been over the accounts “with a dose of salts” and were satisfied.

Myer’s write down comes after rival chain David Jones, owned by South African-based Woolworths Holdings, incurred a $712 million write-down earlier this year.

UBS analysts said concerns over a possible covenant breach have intensified in the wake of the result this morning.

“[second half year-to-date] trading improvement is positive but at the expense of margin, with no mention of medium-term targets. Covenant breach concerns intensify, particularly from the $515m impairment, albeit within [covenants] as at first-half 18,” UBS analyst Ben Gilbert said.

More to come.

Updated 21/3/18 – 14:40 AEDT

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