Captain Brookes keeps ship afloat
Brookes announced on May 23 that Myer's sales had fallen by 2.1 per cent in the third quarter of the group's July financial year, and warned that full-year earnings would be as much as 15 per cent down, downgrading guidance issued six months earlier for a profit slide of up to 10 per cent.
Europe's sovereign debt crisis was expanding, the sharemarket was tanking, and a half-percentage-point rate cut by the Reserve Bank at the beginning of May had not yet turned up in increased trade, Brookes said - and investors fled.
Myer was floated by private equity group TPG in November 2009 at $4.10 a share. Its shares were $2 when the earnings downgrade was announced on May 23, and between then and June 28 they fell another 23 per cent, to $1.54. As the January-half result Brookes has just unveiled confirms, that was a time to buy.
In May last year Brookes was already rebuilding service levels in the department stores, reversing cuts that had robbed Myer of sales and profit momentum.
European Central Bank president Mario Draghi was weeks away from turning the markets around with a blank-cheque promise to spend whatever was needed to defeat any selling raid on Spanish and Italian sovereign bonds.
The Reserve Bank's rate cut in May was also the beginning of an extended easing program. It cut its cash rate by a quarter of a percentage point in June, October and December to pull it down to its global crisis low of 3 per cent. It has not cut rates again this year and will hold for a while after Thursday's astonishingly strong unemployment data for February, but said last week that it had room to go lower if it needed to.
Myer has reported three consecutive quarterly sales increases since the earnings downgrade last year.
That's the best run since 2006, after TPG bought the group from Coles for $1.4 billion. And while sales growth is still modest, it accelerated from 0.8 per cent to 1.4 per cent in the past two quarters.
Net profit in the latest half was up only 0.7 per cent to $88 million, but that was about $3 million better than expected. The shares closed below their high for the day of $3.12, but at $3.07 were still up 17¢, or almost 6 per cent, on the day.
They have risen 90 per cent since that bum-bruising bottom nine months ago. Over the same period, the S&P/ASX 200 Index, which covers about 90 per cent of the market trade, has risen by 23 per cent. CBA's shares have risen by about 30 per cent, BHP is 12 per cent higher, and shares in Myer's department store rival, David Jones, have risen by about 15 per cent.
There are still a few flies in the Myer ointment. Myer was a celebrity float, flogged to all and sundry, and even after the rally its shares are still about 25 per cent under water.
Like all retailers Myer is also fighting internet retailers for market share, and both Australian department store chains were slow to recognise the threat and develop online selling channels of their own.
Brookes is maintaining his target of lifting online sales to 10 per cent of total sales, or about $300 million, within five years and says online revenue is rising at a compound rate of 200 per cent a year. That's off a very low base, though, and the length of the road ahead is implied by the group's unwillingness to disclose online revenue.
Still, there are some signs of progress. The established retailers are settling on a "clicks and mortar" strategy that sees their stores functioning as pick-up points, and in Australia the department stores are becoming more competitive.
Myer is buying more of its product directly from manufacturers, bypassing agents who were taking a cut that forced retail prices higher unless margins were sacrificed. It has also been able to coax, cajole and force suppliers to take lower prices, pulling retail prices here down without squeezing their own profit margins.
Brookes is cautious, but says conditions have improved. The arrival of foreign "fast fashion" stores including Zara and Top Shop is actually increasing traffic in nearby Myer stores, he says.
To really get Myer moving, though, Brookes must successfully roll out his Plan B. His original plan was to grow profits by opening new stores, but that has been heavily modified in the face of the internet onslaught. Plan B calls for sales per square metre to rise as store openings and closures offset each other to maintain Myer's footprint.
Once again, Brookes has made progress. When he took over in 2006, selling space accounted for about 60 per cent of Myer stores that had total space of about 16,000 square metres. Brookes is creating the same selling space in new 12,000-square-metre stores that are 80 per cent selling space.
So far, however, he has only stopped a decline in sales per square metre between 2006 and 2009. To secure Myer's future, he needs to push sales intensity higher.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Myer shares fell sharply after chief executive Bernie Brookes warned on May 23 that third-quarter sales had dropped 2.1% and full-year earnings could be down as much as 15% (revising an earlier guidance of up to a 10% fall). The stock was about $2 when the downgrade was announced and slid to $1.54 by June 28 as investors reacted to the weaker outlook.
Brookes rebuilt in-store service levels, reversed earlier cost cuts, increased selling space efficiency, shifted buying to deal more directly with manufacturers, and rolled out a revised growth approach (Plan B) that focuses on lifting sales per square metre instead of opening many new stores.
Myer reported three consecutive quarterly sales increases since the downgrade and a maiden half profit of $88 million, up 0.7% and about $3 million ahead of expectations. The shares traded around $3.07 (up roughly 6% on the day) and are about 90% higher from their low nine months earlier.
Brookes is targeting online sales of 10% of total sales — roughly $300 million — within five years. Management says online revenue is growing at about a 200% compound annual rate, but this is off a very low base and the group has not disclosed exact online revenue figures, so investors should watch progress closely.
Key risks include ongoing competition from internet retailers, the department store sector's historically slow response to online disruption, Myer still being roughly 25% below its float price after the rally, and the company needing to lift sales intensity per square metre to sustain profit growth.
Plan B replaces a prior strategy of growing profits mainly by opening new stores. Instead, Myer aims to increase sales per square metre by reconfiguring store layouts (new stores are a higher percentage of selling space) and balancing openings with closures — a strategy designed to boost sales intensity and margin without expanding footprint.
Myer is buying more product directly from manufacturers rather than through agents, which reduces intermediary cuts and pressure on retail prices. It has also negotiated lower supplier prices in ways that lower shelf prices for customers without necessarily squeezing supplier margins.
Over the same nine-month recovery period, Myer's shares rose about 90%, markedly outperforming the S&P/ASX 200 Index gain of roughly 23%. For comparison, Commonwealth Bank shares rose about 30%, BHP about 12%, and rival department store David Jones was up around 15%.
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