Australia | May 24 2012
– Myer 3Q sales broadly as expected
– Full year guidance cut on weak trading environment
– Brokers lower earnings forecasts and price targets
By Chris Shaw
While March quarter sales results for Myer were in line with guidance, meaning top-line sales fell 0.9% and like-for-like sales declined 2.1%, the market was more concerned with a further downward revision to earnings guidance for FY12 (year ending July).
The updated guidance factored in a further significant drop in sales activity in both April and May. Guidance is now for FY12 net profit after tax down no more than 15% relative to FY11, which is a cut of 5% from previous indications.
Brokers have been quick to respond by lowering earnings forecasts, RBS Australia trimming its net profit forecasts in both FY12 and FY13, the former by 3% to $138 million while the latter falls to $135.5 million.
JP Morgan has similarly lowered its forecasts by 2% this year and by nearly 6% in FY13, while Macquarie's numbers have come down by 6.9% and 6.8% respectively in earnings per share (EPS) terms. Consensus EPS forecasts for Myer according to the FNArena database now stand at 23.6c and 23.3c respectively.
The changes in earnings estimates have resulted in adjustments to share price targets, the consensus target for Myer according to the database declining to $2.22 from $2.37 previously. Targets range from BA Merrill Lynch at $1.80 to Credit Suisse at $2.80.
Given the range in targets there is also a range of views on Myer, the FNArena database showing the stock is rated as a Buy twice, Hold four times and Sell twice.
Among those with an Underweight recommendation on the stock is JP Morgan, who continues to see downside risk to earnings despite the latest update. This reflects the fact as much as 50% of second half profit is generated in June and July during sale season, yet the sales this year are likely to be in a period when there continues to be significant economic uncertainty for consumers and this may not generate historical levels of foot traffic.
The other issue for JP Morgan is the key for earnings growth for Myer at present is sales growth, yet there continues to be an expectation of significant wage cost inflation over the medium-term. This will pressure margins and make earnings growth more difficult to achieve without a significant kick-up in sales growth. JP Morgan rates stocks within their respective sectors, not within the index.
BA-ML is similarly concerned about the outlook for coming months, as the environment suggests that even while Myer is cycling weak comparable numbers this may not make a significant difference to earnings performance shorter-term.
Citi doesn't see much short-term improvement either given the weakening macro environment, the broker suggesting weak sales growth could continue for at least another 12 months. This limits any scope for outperformance and leaves the broker with a Neutral rating.
RBS Australia also sees an uncertain outlook for Myer, especially given the potential for some "sticker shock" among consumers given pending cost of living increases as a result of the upcoming carbon tax. As well, Myer has little in the way of pricing power, which according to RBS will see margins continue to come under pressure.
The uncertainty of Myer's outlook should continue to weigh on the share price in RBS's view and to account for this the broker downgrades to a Hold rating from Buy previously.
But UBS continues to be more positive, retaining a Buy recommendation in part on a relative basis given Myer remains a preferred exposure in the consumer discretionary sector. In part this reflects the view management are doing a reasonable job despite the adverse operating environment, while UBS also sees longer-term value at current levels.
Post the update Myer shares have responded by falling in a relatively flat market and as at 11.00am the stock was down 2.5c at $1.975. This compares to a range over the past year of $1.92 to $2.94, the current share price implying upside of around 10% relative to the consensus price target in the FNArena database.
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