Mixed Views Greet Myer’s New Look

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

-FY16 dividend under threat?
-Yet earnings more sustainable?
-Capital raising highly dilutive
-More space for concessions
 

By Eva Brocklehurst

The eagerly anticipated strategy review has been unveiled at Myer ((MYR)), along with a substantial capital raising. The department store intends to focus on the high-value customer, changing product ranges, reducing trading space, upgrading designated flagship and premium stores and closing others. Myer will also sub-lease surplus space.

The proposed changes are larger than Credit Suisse expected. The company intends to spend $600m over five years and targets 15% return on funds employed, which implies earnings around $200m in 2020. Credit Suisse calculates, to arrive at these numbers, 3.0% growth in like-for-like sales is required.

Along with the update the company released its FY15 results, weaker than brokers expected and without a final dividend. Myer retains a formal dividend policy, which suggests it expects to pay a dividend in FY16. Nevertheless, Credit Suisse suspects there is insufficient free cash flow to pay a dividend for the next two years. The broker downgrades to Underperform from Neutral.

FY16 will be a year of transition, UBS maintains. The company has a strong brand but continues to lose share so it is realigning its customer base. The broker believes the strategy is not without risk but the allocation and level of capex seems sensible.

UBS does not consider the stock cheap, given the risks and heightened competitive backdrop. Long-term targets appear optimistic in terms of the 3.0% sales growth implied and the broker's forecasts remain below this level, reflecting concerns about execution and the material improvement that is required.

The capital raising comprises a $221m, 2-for-5 non-renounceable entitlement offer at 94c, with the proceeds to be used to reduce debt and fund the new strategy. The institutional portion of the offer is expected to raise $104m. Brokers have incorporated the dilution and weaker near-term earnings outlook, resulting in overall downgrades to forecasts.

Morgan Stanley suspects the company has improved its position in regard to more sustainable profit growth. The company is under-earning relative to its peers but the broker does not expect a turnaround until FY17. 

Long-term earnings margins are forecast at 4.2%, in line with the 20-year average for the company but lower than competitor David Jones' current 5.3%. Nevertheless, Morgan Stanley is confident there is upside to be had and retains an Overweight rating.

The direction is now clear and there are elements to like, Citi asserts. Such as a focus on brands and concessions as well as sales and gross profit per square metre. Of concern is the lack of commitment to investing in staff and a concentration on fashion rather than home wares. Citi wants more detail on the drivers of the expected sales growth to be convinced that the company can break out of a long weak trend.

Concessions will get more floor space and the broker approves. Concessions account for 16% of sales but around 50% of earnings. They generate twice the sales productivity of the remainder of the business while operating costs are lower. Citi suspects the stock will stay range-bound until sales trends improve and upgrades its rating to Neutral from Sell.

The capital raising is highly dilutive but not a surprise to Deutsche Bank. The broker observes other department stores are performing well offshore with a focus on fashion and cosmetics. The high-value customer already shops with Myer, the broker observes, but the strategy is to entice this customer to cross-shop. To this end Myer intends to leverage its strong share of cosmetics expenditure with other categories via an in-store "experience".

What about online? The company envisages the high-value customer is also time poor and active online. Myer aspires to "click & collect" reaching 30% of online sales with 20% of online orders being delivered the same day. The company believes online shopper satisfaction is centred on delivery and has tuned up its logistics.

Nonetheless, Deutsche Bank maintains it could be some time before online shopping is a material contributor to Myer's earnings, although brand building via social media engagement should be beneficial.

FNArena's database has one Buy rating (Morgan Stanley), two Hold and four Sell for Myer. The consensus target is $1.21, suggesting 0.2% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 5.2% and 4.1% respectively.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms