Stockbrokers Remain Positive On Myer

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

By Chris Shaw

Expectations had been for flat sales for the first quarter of FY11, but Myer ((MYR)) disappointed the market on Friday by delivering a 1.5% decline in sales revenue to $706 million for the period. Like-for-like sales were even worse, declining by 1.7% in the quarter.

It was the electrical division that reported the weakest sales performance for the period in delivering a 10% fall in sales, this due to an exit from whitegoods, a cutting of the range of music and DVD offerings and ongoing price deflation.

The weaker sales trend in the division is likely to be an ongoing trend in Citi's view. On the plus side, Macquarie points out sales growth for the period would have been flat if the entertainment/electrical division changes were excluded from the overall figures.

Other points of interest in Myer's sales report, according to Macquarie, were that customer traffic and transaction counts were both down but average price per unit was higher for the period. Citi also notes shrinkage rates continue to fall thanks to the introduction of greater in-store security measures, while Myer exclusive brand sales continue to grow strongly and deliver higher gross margins than the national brands.

While sales growth for the quarter was below market expectations, RBS Australia attributes part of this to the cycling of tough comparable sales numbers. The broker points out Myer was cycling 1Q10 sales growth of 5.2%. These comparables should improve in coming quarters, assuming we can take projections at RBS for gospel, as much lower numbers will be cycled.

Credit Suisse agrees, pointing out sales growth in the second quarter of FY10 was only 0.7%, so beating this number should be a far easier proposition. Credit Suisse is forecasting 2.0% sales growth in the second quarter of FY11.

Even allowing for weaker sales in recent weeks and a less bullish outlook on the Christmas trading period on the part of management, RBS Australia notes full year earnings guidance of 5-10% net profit after tax growth has been retained.

This has kept changes to earnings estimates on the back of the first quarter sales result to a minimum, as for example Citi has cut its forecasts in earnings per share (EPS) terms by just 0.3% in FY11 to 30.7c and by 0.2% in FY12 to 32.6c.

Credit Suisse has cut its EPS forecasts by 0.8% and 0.7% in FY11 and FY12 respectively to 31.5c and 37.5c, which is at the upper end of market forecasts. According to the FNArena database, consensus EPS forecasts for Myer stand at 31.1c in FY11 and 34.8c in FY12.

Given changes to earnings forecasts have been minor so too have changes to price targets, the FNArena database showing an average target for Myer now of $4.42. This compares to a previous target of $4.50 and reflects reductions to the targets of both JP Morgan and UBS of less than 10c to $4.05 and $4.55 respectively.

The database shows Myer continues to be rated as Buy six times, Hold once and Sell once. The Sell comes courtesy of BA-Merrill Lynch, reflecting its view Myer's outperformance relative to the market of better than 20% in the past six months means there is now better value on offer in department store rival David Jones ((DJS)).

Citi is behind the Hold rating on Myer as its numbers suggest less than compelling value at current levels. While sales trends are encouraging, Citi suggests investors look to take advantage of any share price weakness that could stem from weakness in near-term sales results.

As befitting its more aggressive earnings estimates, Credit Suisse continues to see good value on offer in Myer at current levels, pointing out the stock is on a below peer average earnings multiple for FY11, has good free cash flow levels and an attractive dividend yield.

Credit Suisse also expects strong through the cycle earnings growth as Myer continues to improve its product mix and store operations, while new store openings also offer a potential boost going forward. UBS supports its Buy rating with a similar argument, suggesting Myer is well placed to generate superior operating leverage when trading conditions in the retail sector eventually improve.

Macquarie takes the view an improvement in retail conditions may not be too far away, as the impact of rising interest rates is being offset by cuts to income tax and the Australian economy overall continues to perform solidly.

What adds to the attraction of Myer for JP Morgan is the company is working to lift customer service and its product offering and margins overall at the same time as new stores continue to be opened. All of this suggests to the broker Myer is better placed relative to its peers to benefit as the cycle improves.

The market has not yet responded to the bullish arguments for Myer as in early trading today the stock is down slightly despite a stronger overall market. Shares in Myer as at 11.15am were down 2c at $3.86.

Over the past year Myer shares have traded in a range of $2.86 to $4.02, while the current share price implies upside of around 14% to the average price target in the FNArena database.

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