Myer Sales Best In Five Years But Is This Sustainable?

This story features MYER HOLDINGS LIMITED. For more info SHARE ANALYSIS: MYR

-Upgrades to expectations on sales growth
-But how much was discounting?
-What about the high value focus?
 

By Eva Brocklehurst

Is buoyant first quarter sales growth for Myer ((MYR)) sustainable? This is the question brokers are asking. Sales growth came in at 3.9% on a like-for-like basis, but boosted by clearance activity in August.

Credit Suisse calculates that the associated sales revenue from clearances would have contributed around 2.0% to revenue so growth is more likely to be 2.0-2.5% — still the strongest first quarter sales growth in five years.

There was much in the way of changes to how the retailer deals with customers so Credit Suisse believes industry growth has contributed, given positive trends in clothing store sales data. If this were to continue there would be upside to current guidance. The broker upgrades its rating to Neutral from Underperform.

Recent refurbishment of several stores aided the result, which UBS welcomes given the brand has suffered from under-investment in its stores. The broker believes the discretionary sales trends are improving and the capital that has been allocated to turn Myer's business around is appropriate. A more rational promotional environment provides the broker with confidence in the pace of an earnings recovery. UBS also upgrades, to Buy from Neutral.

JP Morgan is not coming to the party, suspecting that clearance activity provided much of the support to the first quarter. The broker also highlights the risks of competition and a lack of compelling valuation support. The recent equity raising has lifted a weight from the balance sheet but JP Morgan wants further evidence the company's bold strategy is working.

The broker is concerned that some of the core customer base may seek bargains and promotions elsewhere, while growth from the higher value customer may be more difficult to access, given the strong performance of its peer David Jones and international speciality stores. The broker sticks with its Underweight rating.

The same concerns preoccupy Macquarie, who also sticks with an Underperform rating. Two refurbished stores were included and boosted comparables, the broker notes. Myer includes refurbished stores immediately in its figures once finished but removes them from comparables when under refurbishment. Another favourable aspect of the quarter was the cold winter weather which would have driven purchases of seasonal items.

Nevertheless, Myer continues to trail David Jones in terms of sales growth, Macquarie observes, with the latter's sales rising 12.2% over the 20 weeks in the year to date. The broker believes Myer's result is good relative to what were low expectations but questions discount-led growth, as it does not fit with a strategy to rely less on price and more on brands and “in-store experience”.

Despite being cautious about the clearance activity, Deutsche Bank welcomes the growth given the business has struggled to lift sales for some time. The broker also lauds the focus on improving stores and turning the business around.

While the track record is not the most polished, Deutsche Bank believes the discretionary retail environment is stronger than it has been for some time and this should help, particularly heading into Christmas. Hence, another upgrade, this time to Buy from Hold.

The support for sales from clearance activity suggests to Morgan Stanley that gross margins are lower year on year. Despite factoring in lower gross margins to reflect a higher level of clearance the broker believes the clean-out of inventory puts Myer in a position to capitalise on the upcoming festive season. Overweight retained.

FNArena's database has four Buy ratings, one Hold and two Sell. The consensus target is $1.15, signalling 8.7% upside to the last share price. Targets range from $1.00 (JP Morgan) to $1.25 (Morgan Stanley). The dividend yield on FY16 and FY17 estimates is 4.5% and 5.0% respectively.
 

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