Myer has conceded that its growth strategies have not generated the expected lift in sales and earnings. While the department store chain secured a 1.5 per cent gain in sales for the first half of the current financial year ended January 24, costs have savaged profitability and represent a significant challenge for the future. Myer’s sales for the latest half were $1.76 billion, up 0.9 per cent on a comparable stores basis, with revenues continuing to be affected by store refurbishments and re
ealignment of the store network.
Sales were bolstered by a 2.5 per cent increase in the second quarter, which incorporated Christmas trading and Boxing Day sales and a 3.9 per cent lift in January sales.
The festive and holiday cheer did not prevent a sharp 23.1 per cent slide in net earnings for the half year to just $62.2 million.
The earnings result was impacted by higher costs, particularly in staffing and occupancy.
While the retailer has said overall costs will be carefully managed in the current half, it is estimated that the expenses will increase by around $15 million over the 2014 cost profile and that an additional $7 million in one off costs will be required to implement initiatives identified in the strategic review.
Myer has reported the cash cost of doing business has risen 6.2 per cent to $569.6 million and underlying costs were up 2.4 per cent in the latest half.
New CEO and MD, Richard Umbers, said this week some elements of the existing strategy represent “solid retail fundamentals”, but overall it did not deliver a business model able to respond the new retail environment.
He conceded Myer has “lost relevance” with some customers.
The numbers
Sales for the first half of the 2015 financial year were not disastrous, but financial analysts had been expecting an increase closer to three per cent, or twice the level achieved, based on the retailer’s assurances that the benefits of earlier investment in the business would be realised this year.
Myer is much less confident of a lift in sales in the current half and has warned that, after allowing for one off costs, full year earnings will fall by at least $25 million from the $98.5 million profit booked for the last full financial year.
Net earnings from trading are expected to be between $18 million and $23 million lower for 2015 compared to 2014, when the $98.5 million net earnings result was 25.4 per cent below 2013.
Effectively, Myer’s net earnings have halved in the past two years and sales have been flat, despite new store openings, refurbishments, and the development of an online sales platform.
Earnings have collapsed despite category and range restructuring, loyalty marketing programs, and an increasing focus on housebrand ranges.
Myer has been pursuing a five point strategy to boost sales and profits, but has gained little traction in a period where consumer confidence and spending has been flat or negative and when global retailers have entered the market.
While Myer talked of improving service on the shopfloor, it was unable to fund any significant improvement, as wage rates, particularly penalty rates, have markedly lifted costs.
Analyst views
The expansion of the store network has added operating costs but provided little impetus to sales, with financial analysts expecting Myer to close at least seven stores to restore profit growth.
Analysts are arguing for a much higher capital investment back into the business, but the problem is the uncertain return on investment to justify any higher capital spend.
The business will benefit in capital investment from landlord contributions going forward, potentially boosting results without funds being drawn down from its own coffers, but in the latest half Myer curtailed its capital investment.
Umbers’ comment that Myer has lost relevance to some customers acknowledges that the department store chain has failed to connect with the younger market who have spending power.
It has bled marketshare just as it has lost momentum in sales and earnings and the double edged measures of its problem in expanding the customer base is illustrated by two figures it boasts as a positive – sales from the Myer One loyalty program represent almost two thirds of total sales, while Myer exclusive brands have grown to more than 20 per cent.
The future
Umbers, trying to put a positive spin on circumstances in his first outing after being appointed CEO earlier this month, said sales have been ahead of last year in February and March, but concedes they remain below expectations.
Myer now anticipates operating gross profit margin pressure to continue during the second half and, while cost containment is a key focus, the projected net earnings are likely to be below the $17.5 million, but not as bad in percentage terms as for the first half.
In fact, Umbers believes Myer can increase its sales by more than three per cent in the current half compared with 2014, effectively twice the rate of growth achieved in the first half.
Both the Myer sales and earnings recovery forecasts for the current half seem optimistic, with higher costs and the impact of a weaker Australian dollar hitting profit margins and potentially discouraging customers from accepting higher pricepoints in a competitive market.
In part, the improved performance is predicated on two new stores, four major refurbishments, and additional space in the flagship Myer Melbourne store, but floorspace and productivity gains have done little to achieve sales targets in the past five years.
Discussing the strategic review undertaken by Myer, Umbers said the retailer acknowledges that in recent years, cost growth has outpaced sales growth, and profits have declined.
“At a macro level, the challenges are well known, particularly the globalisation of retail which has brought new competitors to our shores.
“Digitisation has both empowered the consumer and created new channels to market. Customers have changed the way they shop and their expectations of retailers have changed significantly.”
Umbers said there is strong evidence that department stores can transform and be inspirational to customers.
“Our international peers have responded to disruption by leading in omni-channel, by reinventing the instore experience, overhauling the range, and by differentiating through innovation.
“Our new strategy to bring the love of shopping to life will be guided by a clear vision and a plan to win back marketshare, to respond faster to change and deliver a sustainable recovery in earnings.
Umbers said the “enablers” of the new strategy include customer driven decision making, a transformed merchandise assortment with strong brand emphasis, and an improved space allocation and instore experience.
“We are confident that there is a significant opportunity available to the business in a changing retail landscape,” Umbers said.
This story first appeared in Inside Retail PREMIUM issue 2038. To subscribe, click here.