The sales breakdown that accompanied Myer's results yesterday showed how big a hole retailers are in as external shocks here and overseas convince shoppers to keep their hands in their pockets.
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.
Frequently Asked Questions about this Article…
What caused Myer’s recent sales slump and volatile trading performance?
Myer’s sales slump was driven by a series of shocks to consumer confidence noted in the article: interest rate rises (the Reserve Bank lifted its cash rate from 4.5% to 4.75%), weak employment numbers, renewed signs of economic stagnation in the US, US debt drama in July and Europe’s sovereign debt concerns. Those events prompted abrupt changes in shopper behaviour, producing periods of slump, brief stabilisation and further declines across the year to July.
How large were Myer’s sales and same-store sales declines?
For the year to the end of July Myer reported overall sales down 3.8%, and same-store sales (which strip out new store openings) were down 5.5%. Performance varied by period: same-store sales were 3.1% lower in the three months to end-April, but plunged 7.9% on a same-store basis in Myer’s final quarter.
What happened to Myer’s net profit and what is its profit outlook?
Net profit fell 3.6% to $162.7 million, which was within the company’s lowered guidance from February. Myer also predicts net profit for the coming year will be almost 10% lower than the $162.7 million it just reported—an ambitious target that assumes trading conditions do not worsen.
What new costs and cost pressures is Myer facing this financial year?
Myer will book about $48 million of new costs this financial year tied to opening more stores and absorbing the cost of a new enterprise bargaining agreement with employees. Management says it must find new savings or higher profits to offset at least half of that $48 million in extra costs.
What actions is Myer taking to improve margins and control losses?
To boost margin and control losses Myer plans to shift more sales into higher‑margin house brands, clamp down on shoplifting, tightly manage stocks and markdowns, and improve service levels. Management describes the business as operationally 'ship‑shape' and aiming to bolster sales when conditions improve.
How could interest rate expectations affect Myer and retail spending?
The article notes a silver lining: expectations for further rate rises have eased, with the Reserve Bank probably on hold until at least mid next year and the possibility of cuts if the economy weakens. Lower or stable interest rate expectations could help consumer confidence and retail spending, but the article warns downside shocks could still hurt sales.
What risks from international events could impact Myer’s Christmas and New Year trading?
The article flags continued risk from 'left‑field' shocks—especially Europe’s sovereign debt problems highlighted by a UBS announcement—which could drive sentiment and spending lower. The nightmare scenario described is enough shocks arriving before the crucial Christmas‑New Year trading period to weaken consumer spending and hurt sales.
Should everyday investors be concerned about Myer’s retail strategy and short‑term prospects?
The article presents a balanced view: Myer faces clearly identified near‑term challenges—weaker same‑store sales, $48 million in added costs and a forecast of a lower net profit—yet management says operations are in good shape and it has a plan to improve margins (house brands, stock control, anti‑shoplifting measures). Everyday investors should watch key indicators such as same‑store sales trends, profit guidance updates and broader consumer confidence/interest‑rate developments.
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