Where to now for Myer?

MyerMyer might as well have a ‘renovator’s delight’ sign at the entrance to its stores but with a caveat – buyer beware.

The retailer has reigned for over a century as one of the most trusted retail brands in Australia and the leading department store group.

Today, Myer is in serious trouble and despite annual sales of more than $3 billion, its value has tumbled dramatically with its shares trading this week at a lowly 35 cents.

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At its current share price, Myer is vulnerable to a takeover that might well be viewed more as a relief than hostile by shareholders, who have seen their investment fall to less than 10 percent of the $4.10 price on debut on the Australian Stock Exchange in 2009.

But the question is, who would want to buy Myer now?

The retailer’s board values the business at $580 million, while the share market judgement is that it is worth more than $200m less.

The $580 million asset value asserted by directors follows a $538m write-down on its balance sheet that virtually halved Myer’s carrying value on assets and goodwill.

This asset value is a critical number for Myer, as the retailer could potentially breach covenants and undertakings to lenders if the value fell was to fall below $500m.

Myer is currently in talks with lenders to refinance debt and to secure higher covenant thresholds to relieve some of the pressure on the retailer as it faces the prospect of increasing institutional investor scrutiny in the immediate future.

While chairman, Garry Hounsell, attempted to put the best light possible on the first-half results for the 2018 financial year, investor confidence in the board and management is at an all-time low.

While Hounsell is the caretaker CEO after the abrupt departure of Richard Umbers last month, the low confidence levels reflect, in part, concerns about the retail experience of the board, the talent level of senior management and the vacant chair for a permanent CEO.

Myer have conducted interviews with a number of candidates that Hounsell described as “suitably qualified and experienced” but investors remain wary, particularly after the former Myer executive and CEO of the collapsed Dick Smith chain, Nick Abboud, was rumoured to be a candidate for the CEO role.

Cause for concern

Of course, investors are not the only stakeholders concerned about Myer.

Company staff are disheartened and their morale is low, suppliers are frustrated, concession retailers are angry and exasperated and customers are confused and dissatisfied.

Hounsell’s promise of a “renewed company-wide focus on product, price and customer service to improve trading”, has a hollow ring that stakeholders have heard many times before over the past two decades.

Myer has been pursuing hopeful turnaround programs for more than two decades under previous ownerships in Coles Myer group and then private equity firm, Newbridge Capital, which acquired the chain for $1.4 billion in 2006, before a return to public ownership in 2009.

The private equity owners had spruced up Myer and netted a handy profit on the $2.4 billion float on the Australian Stock Exchange in November 2009, but from day one shareholders were left to count losses on their investment.

Myer sales peaked in the 1994-1995 financial year at $3.4 billion and, despite opening new stores and upgrading flagship stores, sales are close to falling below the $3b mark.

The sales decline is partially explained by the closure of underperforming stores, including some that were opened as part of an optimistic ‘build it and they will come’ strategy pursued by former CEO, Bernie Brookes.

However, there is an underlying decline in sales regardless of store closures and would be worse if it were not for the revenues generated by concessions within Myer stores.

For the first-half of the 2018 financial year, Myer total sales declined by 3.6 percent to $1.72 billion, and were down 3.0 per cent on a comparable store basis.

The net after tax result for the 26 weeks was a loss of $476.2 million after the massive $538 million write-down on the accounts but significantly also including a one-third fall in trading profits from $62.8 million in the comparable half in FY2017 to just $40.1m in the 26 weeks to January 27 of 2018.

Hounsell noted in the financial reports to the Australian Stock Exchange last week that Myer had trimmed its cost of doing business by 3.5 percent, but that gain was offset by lower sales, reduced supplier contributions and shrinkage that cut into margins.

The former Qantas chair also conceded the results for the half-year were unsatisfactory and reflected a number of execution issues including, for example, the failure to respond appropriately to the heightened competitive environment prior to Christmas. Hounsell also admitted 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.

Eyes turn to third largest store

On a positive note, Hounsell highlighted Myer’s online performance as the “standout element” of the first-half result and said the management team was devoting additional resources to maximise its potential.

With a 48.9 percent increase in sales to $105.2 million in the latest half, the online business is effectively now Myer’s third largest store.

Hounsell said Myer management are investigating the viability of establishing both online and loyalty as separate business units to give them more prominence as future growth drivers.

“I am encouraging the team to explore commercial partnerships to capitalise on their potential and unlock shareholder value,” he said.

Hounsell has promised “a renewed focus on product, price and customer service”, which Myer expects to re-engage its traditional customer base.

“My ongoing engagement with customers, team members, supplier partners and external stakeholders has reinforced my view that Myer must regain its historic reputation for great value and customer service,” commented Hounsell on Myer’s results lodged with the Australian Stock Exchange.

“The work on value is progressing well and with the right training, together with appropriate incentives and supported by technology, our team members can deliver on our customer service aims,” he said.

“In order to improve the performance in our stores, we need to direct our marketing and visual merchandising towards our new, exclusive and on-trend products, backed by compelling value and promotions.”

The clearance centres in selected stores remain in place, a concept that bears testament to poor buying strategies and the selection of merchandise that customers don’t want to buy.

However, Hounsell indicates a return to merchandise ranges that appeal to the traditional Myer department store customer as well as a return to discounting – a rather crude word for promotions.

Myer’s push to lift its customer service levels will be, it seems, driven by a commission sales incentive scheme but there is little indication of an increase in staffing levels in stores – one the most frequent criticisms of customers.

Hounsell has also indicated the retailer is pursuing discussions with landlords, on a whole portfolio basis, relating to total occupancy costs, space productivity, lease tenure and capital investments.

Put up or shut up

Analysts, former Myer CEO Bernie Brookes and fierce Myer critic and shareholder, Premier Investment’s chairman Solomon Lew, have all argued for a substantial reduction in the number of stores as a means of improving return on investment and restoring profit growth.

Lew has intensified his criticism of the Myer board and management after the release of the $476 million loss and halved asset value. Lew is expected to call for an extraordinary general meeting of shareholders to press for changes to the strategy and to Myer leadership

While investors share Lew’s concerns and agree with most of his criticisms, they are loathe to back his intervention.

There is a ‘put up or shut up’ view among some investors that want Lew to propose a formal takeover bid amid an increasing hope that other suitors might emerge, including David Jones owner, Woolworths Holdings, or private equity firms.

Shareholders are not confident about revival under current leadership but are also not keen enthusiastic about selling out at current share prices, even with what would be a modest premium.

 

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