Brokers Expect More From Myer

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

-Reliance on concessions growing
-Flagship stores driving growth
-Rationalisation continues
-Competition heightened

By Eva Brocklehurst

Brokers were heartened by department store chain Myer's ((MYR)) first half result, which showed progress for its transformation strategy. Nevertheless, they expect more to be done and believe more needs to be done.

Credit Suisse observes sales were less reliant on private labels in the half as concessions made a larger contribution. This led to a decline in gross margins of 187 basis points and this was further affected by depreciation in the Australian dollar and clearance activity from the first quarter. The broker expects the continued store optimisation should take costs out and help offset the gross margin decline while profit should stabilise.

The fact that concession sales substantially supported earnings in the half year disappointed Citi, along with the fact earnings were down 6.0% and the gross margin was under pressure. Guidance was upgraded to the top end of the prior forecast range, to $66-72m for FY16. Cost guidance for restructuring was also reduced to $20-30m from $35-45m. An interim dividend of 2c added a surprise sweetener to the results.

Of most concern to Morgan Stanley is that clearances, concessions and a robust Christmas period have likely camouflaged the fact that foot traffic has not altered. The broker believes Myer is still relying on cost reductions to hold profitability at certain levels, and getting costs out of the business is obviously a finite goal.

Although margins are considerably lower, which implies longer-term upside, and the balance sheet has improved, Morgan Stanley considers the valuation now looks reasonable and downgrades to Equal-weight from Overweight. The broker suspects the structural pressures faced by the incursion of foreign retailers remain in force.

Myer is having difficulty emulating its strength in cosmetics across its apparel and accessories departments, Ord Minnett believes. In cosmetics the brand portfolio is strong and there a fewer competitors but in apparel and accessories there are brand perception issues and greater competition. The competitive environment in department stores is intensifying the broker suspects, especially from rival David Jones.

The company's flagship stores are driving growth. Moreover, while the closure of stores in the last 12 months affected total sales the remainder were more efficient, Macquarie observes.

The Brookside store in Queensland will now close from January 2017 and Myer has confirmed it will not open new stores in Tuggerah (NSW) and Coomera (QLD) as previously planned. Macquarie also expects the company to cancel the Myer opening in Darwin (NT) although this has not been flagged. Management has suggested potential to rationalise up to 20% of the footprint to increase productivity.

The broker also observes the mix-shift towards concessions has allowed a reduction in costs and improved efficiency across the whole business. That said, while the indications at this stage of the transformation are positive, there are challenges in executing the strategy in store and further network rationalisation.

Macquarie notes David Jones and specialty retailers continue to aggressively roll out stores and take market share. One interesting snippet Macquarie highlights is the fact that online sales continue to experience strong growth, with 25% of this sales growth emanating from in-store purchases on tablets.

Deutsche Bank flags some signs of progress but maintains this is priced into the stock. The broker suspects the move towards concessions will make the profit & loss account difficult to interpret and reduces visibility but acknowledges Myer is benefiting from better trading conditions. Still, Deutsche Bank only upgrades estimates modestly, believing the composition of the results remains weak.

FNArena's database shows two Buy ratings, four Hold and one Sell (Ord Minnett). The consensus target is $1.25, suggesting 2.3% upside to the last share price. Targets range from $1.10 (Ord Minnett) to $1.40 (Citi). The dividend yield on FY16 forecasts is 4.4% and 4.5% on FY17.
 

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