Myer’s Sales Growth Remains A Concern

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

By Chris Shaw

Since its re-listing late last year the share price performance of retailer Myer ((MYR)) has been disappointing. Earnings performance appears to not be the explanation, as the company yesterday delivered interim earnings a little ahead of prospectus forecasts.

The result of $181 million before interest and tax was also slightly above market consensus of $178 million, while on an after tax basis the result came in at $114.8 million, which equates to growth of 38%. Citi notes this earnings growth was largely the result of cost savings, Morgan Stanley pointing out margin growth in the period was limited.

Post the result Bank of America Merrill Lynch suggests Myer is likely to meet its full year profit forecast of $160 million, with scope for the result to be as high as $163-$165 million depending on how aggressive management is in cutting costs further in coming months.

With full year earnings guidance unchanged and the interim result a little better than expected, brokers have generally made minor increases to their earnings forecasts. For example, JP Morgan has lifted its earnings per share (EPS) numbers by 0.4% in FY10 and by 1.8% in FY11 to 27.4c and 31.9c respectively.

RBS Australia has increased its net profit forecasts by 3.0% and 2.2% in FY10 and FY11 so its EPS estimates now stand at 28.3c and 32.5c, while Credit Suisse's forecasts of 29.3c and 33.6c are up 3.1% and 0.9% respectively. Consensus EPS forecasts according to the FNArena database stand at 28c for FY10 and 31c for FY11.

Myer shares closed yesterday at $3.44, and they have risen again this morning to $3.48. On FNArena's consensus forecasts this places the shares on a FY10 Price-Earnings ratio of a rather modest 12.4 (the market in general is trading on a multiple in excess of 16). If we look at the FY11 consensus forecasts, the PE ratio drops to 11.2. As a comparison, main competitor David Jones ((DJS)) is trading on PE ratios of 15.7 and 14.2 respectively.

The issue for some analysts with respect to Myer is sales growth, as along with the interim profit result management has lowered sales growth guidance for the full year to between 1.0-2.0%, down from the 3.0% expected at the times of the interim sales update last month.

As Bank of America Merrill Lynch notes, this implies sales growth in the second half of 0-2.0%, which suggests management appears to be cutting costs to compensate for the sales shortfall to meet short-term profit objectives.

Morgan Stanley agrees lack of sales growth should be of concern to investors, particularly as there is the risk the significant discounting evident late in the second half may prove to be an ongoing trend. What makes this more likely in Morgan Stanley's view is that both Myer and David Jones will ramp up new store activity in coming years.

For BA Merrill Lynch the short-term measures being taken to deliver on earnings may see Myer struggle to grow the business longer-term, as the current moves will potentially cause a deterioration in the underlying business. This means there is scope for future downgrades to estimates.

To reflect this, BA-ML retains its Neutral rating on the stock, one shared by Morgan Stanley given its concerns with respect to the sales growth outlook. Morgan Stanley has a cautious view on the retail sector generally.

Others in the market are more positive though, Citi pointing out the cut to full year sales growth guidance is relatively minor given it implies only about a $10 million change from prospectus forecasts. Longer-term Citi expects the Bourke Street store rebuild and the ramp-up profile for new stores will be enough to create value, so it retains its Buy rating.

Macquarie rates the stock as Outperform on valuation grounds, pointing out the company at present is only 44 months through a 50 month turnaround period during which management has done very well in cutting costs.

While the (highly regarded) Myer brand now needs to be leveraged to lift sales, Macquarie sees this as possible given current expansion plans will increase total selling area by as much as 22%. The stockbroker expects this will translate into $500 million in additional sales by FY15.

Credit Suisse also has an Outperform rating on Myer as it sees it as well placed to benefit from a more normal consumer spending environment, with FY11 expected to show evidence of this in its view.

JP Morgan similarly rates the stock as Overweight as in its view the medium-term outlook for store numbers and earnings margins is positive, which JPM suggests implies significant upside earnings potential. Overall, the FNArena database shows Myer is rated as Buy eight times, Accumulate once and Hold once.

The average price target on Myer according to the database is $4.38, up from $4.37 prior to the result. Shares in Myer today are slightly higher and as at 11.55am the stock was up 4c at $3.48, which implies around 24% upside to the average price target (dividends not included).

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