Positive First Quarter For Myer But Headwinds Prevail

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Department store Myer flagged a positive performance in the first quarter but most brokers are wary of the headwinds prevailing in retailing.

-Guidance assumes no significant deterioration in consumer sentiment
-New Myer initiatives appear to be driving sales growth
-Clearance activity heightened after "poor" spring
 

By Eva Brocklehurst

Department store Myer ((MYR)) has outlined a rather upbeat first quarter performance and guided to an expansion of its operating earnings margin and growth in net profit in FY17.

Like-for-like sales rose 1.6% in the first quarter on a comparable store basis and 0.6% on a total sales basis, with the difference being the absence of the Warringah Mall, Hobart and Wollongong stores from the comparable sample.

While acknowledging an opportunity for management to re-shape Myer after a poor financial performance over many years, Ord Minnett still expects it will be a challenge in a difficult industry environment, as guidance assumes no significant deterioration in consumer sentiment. Credit Suisse concurs, suggesting that material downside risk in FY17 lies with the potential for consumer spending to slow further because of the weaker labour market.

The broker expects the impact of initiatives on merchandise and store refurbishment should be greater in FY17 and lead to an acceleration in reported sales growth. The broker believes it also likely that profit will grow at a faster pace than sales, because of the company's low profit margin.

Morgan Stanley observes the company has lapped a tough comparable period and that its performance was stronger than peers, which signals that the New Myer strategy is gaining traction. The broker envisages valuation support emerging, given the recent pull back in the share price, yet also remains cautious regarding Christmas trading, given the multiple headwinds for retailing.

Given cost growth to be in the range of 2-3%, Myer needs to accelerate its top line sales growth to achieve its targeted margin expansion, in the broker's calculations.

Deutsche Bank also considers the first quarter a reasonable result, especially as strong comparables were cycled. The broker's first half forecast implies 2.3% sales growth in the second quarter, which it acknowledges would require an acceleration, but the comparison will become easier, and the Warringah refurbishment should provide a tailwind.

The broker also believes like-for-like sales growth is reasonable in a context of the unfavourable weather over the period. The update provides further evidence that the new initiatives are driving sales growth, although Deutsche Bank expects gross margins will continue to decline as a result of the concession mix, with the cost of doing business being reduced to make up the difference.

While the stock is not expensive, in the discretionary retail space the broker prefers exposure to Harvey Norman ((HVN)), which trades is only a modest premium and offers strong earnings growth. Deutsche Bank reiterates a Hold rating.

Citi retains its Buy rating on Myer and believes the sales growth trajectory should improve, impressed that the underlying trend is better on a two-year stack basis. The broker also flags the fact that growth relative to David Jones has improved.

Sales growth was also more resilient than Macquarie expected and the recent sell-off in the stock is considered overdone. That said, clearance activity has been higher for the industry this spring and bodes poorly for margin risk over the first half, in the broker's opinion. The company has noted the first quarter included a “Spring Clean” clearance for brands which Myer no longer stocks and this took place at significant mark-downs in price.

UBS also found the result pleasing, given recent peer commentary suggests market trends have slowed. The positive impact from the continued rationalisation of unproductive space is also a positive. UBS lifts net profit estimates to reflect slight changes to guidance, and beyond FY17 expects around 11% compound growth in earnings per share, which is modestly below management's medium-term targets.

The broker has become incrementally more positive on the stock following the update and believes management is making good progress on the turnaround. However, risks remain around international players and more competition in the market, as well as rising costs and overall execution.

FNArena's database shows two Buy ratings and five Hold. The consensus target is $1.31, suggesting 7.5% upside to the last share price targets range from $1.00 (Morgan Stanley) to $1.50 (Ord Minnett). The dividend yield on FY17 and FY18 forecasts is 4.4% and 4.9% respectively.
 

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