Australia | Mar 16 2012
– Myer interim slightly below most forecasts
– Weak sales growth still an issue
– Yield attractive, earnings outlook not so much
By Chris Shaw
Myer ((MYR)) delivered an interim net profit of $87.3 million, which was a 20% decline in year-on-year terms and marginally below most forecasts in the market. Guidance is for full year earnings to decline by 10%, a target seen as somewhat optimistic by some brokers covering the stock.
As an example, Deutsche Bank suggests while the interim result showed an improvement in gross margins despite a tough trading environment, the big issue for Myer is weak sales growth. This weakness has been compounded by news of further delays to Myer's store pipeline and management's goal of rationalising existing space.
This has played into revisions to earnings estimates, as UBS has lowered its FY13 estimates by 4% and its FY14 numbers by 8% to reflect the store roll-out delays. Deutsche has reacted in a similar matter and cut outer year forecasts by more than 5.0%.
Also impacting earnings estimates is increasing costs, as BA Merrill Lynch notes Myer is now reinvesting back into service. As Citi points out, Myer increased staff hours in the first half by 450,000 or 6% but this remains 11% below FY10 levels.
Citi estimates staff costs would need to increase by $60 million or 190 basis points to match that level, something expected to put some pressure on margins. Short-term BA-ML doesn't see this as an issue as costs elsewhere are being pulled back, but the ability to continue to cut costs to sustain gross margins remains in question for the broker.
Post the interim result, consensus earnings per share (EPS) forecasts for Myer according to the FNArena database stand at 24.5c for FY12 and 25.2c for FY13. The consensus price target is $2.44, which is unchanged from before the interim. Targets cover a wide range, from Credit Suisse at $2.80 to BA-ML at $1.80.
The range in targets is reflected in a range of views on Myer, with the FNArena database showing the stock is rated as a Buy three times, Hold four times and Sell once. The Sell recommendation comes from BA-ML and reflects the broker's view challenges facing Myer are likely to mean earnings a year from now will be lower than reported in the first half of FY12.
This is based on the view online sales will continue to pressure prices, on further upward cost pressures for the group and a step change down in the Myer-One loyalty scheme. As well, BA-ML sees department stores as suffering from an ongoing loss of relevance in general. Such a combination of factors makes share price outperformance unlikely in BA-ML's view.
Deutsche agrees a share price re-rating is unlikely given a significant improvement in sales growth remains unlikely, especially given delays to the store roll-out program. Citi also rates Myer a Hold, suggesting while the dividend yield of better than 8% fully franked is attractive the earnings outlook is not when the combination of weak sales trends and rising operating costs is expected to continue.
UBS argues the Buy case for Myer by suggesting while full year guidance is challenging it is also achievable. Assuming management's earnings guidance is met, and when factoring in the yield on offer, the broker sees the stock as attractive at current levels.
Shares in Myer today are weaker and as at 10.40am the stock was down 6c at $2.23. This compares to a trading range of $1.92 to $3.35 over the past year and implies upside relative to the consensus target in the FNArena database of a little more than 6%.
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