Beginning to look a little like Christmas

Myer's sales slumped, stabilised and then slumped again in the year to July, and chief executive Bernie Brookes says trading levels have been responding almost immediately to shifts in confidence.

Shocks to consumer confidence took many forms: interest rate rises in the first half of the year, weak employment numbers in recent months, renewed signs of economic stagnation in the United States, Washington's unseemly debt reduction drama in July, Europe's expanding sovereign debt crisis and the market plunges that accompanied almost all of those developments, to name a few.

Myer's sales were down 3.8 per cent for the year to the end of July and by 5.5 per cent on a same-store measure that irons out store expansions and new store openings, but it was a roller-coaster ride.

The department store group hit the wall along with all retailers in the second quarter of its financial year after the Reserve Bank raised its cash rate from 4.5 per cent to 4.75 per cent on November 3 and commercial banks increased their lending rates by even more.

After that, Myer seemed to be stabilising, albeit on a weak base. Sales were a less scary 3.1 per cent lower on a same-store basis in the three months to the end of April. But in Myer's final quarter, sales plummeted by 7.9 per cent on a same-store basis.

The 3.6 per cent fall in net profit to $162.7 million Myer revealed yesterday was within February's lowered guidance for a profit drop of up to 5 per cent, but Brookes says the pressure is still on as bad news continues to flow.

Myer will be booking about $48 million of new costs this financial year as it opens more stores and absorbs the cost of a new enterprise bargain with its employees.

It expects same-store sales to decline by about 2.5 per cent: they are down about 3.8 per cent since July 31 compared with the same period last year, but the Christmas-New Year period is expected to be stronger than the 2010-11 season that was hit by floods and the Reserve's November rate rise.

Myer also predicts net profit for the year will be almost 10 per cent lower than the $162.7 million it has just reported, and that is actually an ambitious target.

This assumes trading conditions will not worsen, for one thing. And it puts the weights on Myer to find new savings or higher profits to offset at least half the $48 million in extra costs it will incur as it expands its stores and absorbs higher employee costs.

The company has to do this while it moves to attract more customers by improving service levels. Brookes says the group will shift more sales into its higher-margin house brands, continue a clampdown on shoplifting and tightly control stocks and markdowns.

Cost microsurgery wasn't supposed to be as crucial to earnings as it is now, based on the plan Myer laid out when it floated in 2009. Nonetheless, Brookes says Myer is operationally ship-shape and poised to bolster sales and profit growth when conditions improve.

There's also a new ray of light, since Myer closed its books at the end of July, in the form of sharply lower expectations for an interest rate rise. The Reserve Bank is probably on hold until the middle of next year at least and could cut rates if the economy weakens.

Yesterday's UBS announcement, however, underlines that left-field shocks are still rolling in - from debt-laden Europe in particular. The nightmare scenario for Myer and the retail industry is that there will be enough of them to drive sentiment and spending even lower in the months ahead, and during the crucial Christmas-New Year trading period in particular.