Myer Fears The Grinch

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

-Pre-Xmas conditions subdued
-Are expectations too high?
-AUD headwinds significant
 

By Eva Brocklehurst

First quarter sales were a little drab for Myer ((MYR)), up just 0.1% overall, but brokers differ in their interpretation of the department store's outlook. Morgan Stanley accepts the weakness stemmed from refurbishments, which are now out of the way, and that momentum should improve, but wonders whether shaky consumer confidence in this crucial Christmas quarter will provide enough acceleration.

Management has indicated second quarter sales account for 75% of the annual profit and the broker notes prior commentary has also indicated the other profitable quarter is the fourth. The fact that the first and third quarter are loss making is not necessarily a concern, as many retailers sustain losses in seasonally weak quarters, but Morgan Stanley considers it becomes an issue if consumer demand is also weak heading into Christmas. Moreover, international players are likely to ramp up the pressure on pricing this Christmas.

New stores at Joondalup and Mt Gravatt should help growth momentum and the broker does acknowledge the company's comments that exclusive brands, cosmetics and toys all performed better than average in the first quarter. These products usually generate higher profits compared with the average across the store. Online also boosted growth, but in this case the broker suspects margins are relatively narrow and would not help profitability. Macquarie believes the sharp share price reaction to the subdued result reflects a greater-than-expected disruption from refurbishments. Structural challenges continue to plague department stores but Macquarie believes there is risk to the upside if sales momentum is maintained in the critical second quarter.

Citi maintains the market's negative reaction to the weak first quarter fails to recognise the timing of refurbishments and new store openings. The broker expects sales growth will be better over the next nine months but also believes consensus expectations are too high at 3.8% growth for FY15. Citi forecasts sales growth is more likely around 2.6%. Peer valuation multiples have risen and there could be as much as 13% upside for Myer over 12 months, in the broker's view. The stock does not qualify as a buy for Citi, which retains a Neutral rating, but, there are more reasons to be cheerful about retail sales growth and the broker expects Myer, like all other retailers, will be a beneficiary.

JP Morgan takes a different view. The broker considers sales growth has been elusive over the last 20 years for Myer and, while a return to like-for-like sales growth in FY14 was pleasing, momentum appears to have ebbed in the first quarter. Acknowledging that new stores, online and refurbishments should drive sales in FY15, the broker still believes competitive pressures will hinder growth. Australian dollar headwinds are significant and deflation remains a risk. Competition is also ratcheting up the rate of cash growth required.

Myer's valuation remains uncompelling for the broker and an Underweight rating is retained. UBS also continues to envisage risks from increased competition, further investment in competitor David Jones under new ownership and share loss to specialty retailers. The broker points to signs of further market share loss across the fashion segment and for the department store as a whole, despite winning a major brand such as Napoleon cosmetics. On balance, UBS believes risks are to the downside for earnings, while the risk to the broker's Sell call comes from corporate activity in the form of a takeover bid.

Myer runs the gamut on the FNArena database, with two Buy, four Hold and two Sell ratings. Consensus target is $1.97, suggesting 13.0% upside to the last share price. The dividend yield on FY15 and FY16 forecasts is 7.5% and 7.7% respectively. Targets range from $2.30 to $1.60.
 

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