Myer Keeps Market Views Divided

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

By Chris Shaw

Department store group Myer Holdings ((MYR)) delivered a solid full year profit result, FY10 earnings of $169 million coming in slightly better than the market consensus forecast of a result of $167 million.

The result was particularly solid given, as Citi notes, it came despite soft sales in the period. The group's sales performance has received mixed views, with BA Merrill Lynch suggesting sales growth appears to be struggling given it remains behind the expectations of both management and the market.

But Goldman Sachs is a little more positive, pointing out the end of cycling of stimulus payments has been reflected in better retail sales in Australia in both June and July. The broker expects this trend will continue through both the result of this year and into 2011.

The other positive for Myer's sales growth outlook is the group is expected to open a further 13 stores by FY14. Goldman Sachs sees this as a positive for sales overall, while also noting there is a strong correlation between retailer earnings multiples and the retail sales cycle.

Citi also expects sales growth for Myer to accelerate in FY11, though the pace of this growth may be impacted by a reduction in discounting and some margin pressure coming from an increase in staffing costs.

As Citi notes, Myer management intends to lift staff hours by 8% in FY11 to lift customer service levels. On Citi's numbers a further 20% increase is needed in coming years to lift service levels up to those offered by competitor David Jones ((DJS)).

The good news, in Citi's view, is despite the increase in staff costs Myer's margins should still rise, thanks to growing sales from the Myer Exclusive Brands range. Citi expects gross margins should rise by around 45 basis points in FY11.

This suggests earnings guidance for FY11 of 5-10% growth in net profit is achievable, a view shared by BA Merrill Lynch. BA-ML suggests a stronger Australian dollar should help more than margins in this regard, as in the broker's view the increase in gross margin recorded in 2H10 appears unsustainable.

Given Myer's profit result largely met expectations, revisions to earnings estimates post the result have been relatively minor. Both Morgan Stanley and UBS have trimmed their earnings per share estimates slightly, while BA-ML has lifted its numbers by less than 10% in both FY11 and FY12. The FNArena database shows consensus EPS forecasts for Myer now stand at 31.2c in FY11 and 34.9c in FY12, compared to the 29.4c achieved in FY10.

While the Myer result was solid, there remain mixed views on the stock, for several reasons. Post the profit result Citi has downgraded Myer to Hold from Buy on valuation grounds, the broker noting the stock has rallied 23% over the past three months.

No other ratings have changed, which means BA-ML continues to rate the stock as Underperform. This is based on the view performance of the underlying business is not improving, as margin gains appear unsustainable, sales growth is struggling and cost reductions appear to be damaging the business through poor customer service levels.

Morgan Stanley is not in the FNArena database but also has a neutral view on Myer, rating the stock as Equal-Weight within an In-line industry view. Its view is with the cost reduction process now complete, it will be sales growth that drives the business, but as sales essentially haven't grown since 1992 there is reason to be sceptical on such an outcome.

JP Morgan and Goldman Sachs are among the more positive, the former noting while management still has to prove itself somewhat the medium-term outlook remains positive. Goldman Sachs, which is similar to Morgan Stanley not included in FNArena's daily market coverage, agrees, expecting a general upturn in retailing in coming years and new store openings will drive sales and therefore earnings growth for Myer.

Overall, the FNArena database shows Myer is rated as Buy six times, Hold once and Underperform once, with an average price target of $4.36. Shares in Myer today are slightly stronger and as at 10.35am the stock was up 3c at $3.95.

Over the past 12 months the stock has traded in a range of $2.86 to $4.00 and the current price implies upside of around 11% to the average price target in the FNArena database.

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