Myer dresses down

Encouraging signs in Myer's online and brand ownership strategies cushion some of the blow from the retailer's downgrade, but its external operating pressures are unlikely to ease anytime soon.

Myer’s third-quarter sales results, and its earnings downgrade, underscore how much the retail sector needed this month’s 50 basis point cut to official interest rates and beg the question of why the Reserve Bank didn’t move a little earlier.

The faint hope for retailers being ground down by the anxiety of consumers is that the cut – most of which has flowed through to home loan rates despite the retention of some of the 50 basis points by the banks – is that it helps stem the continuing erosion in their sales bases and margins.

With daily headlines of large-scale job losses, sliding house prices, volatile stock markets, the continuing turmoil in Europe, a dollar that remains strong and the widely-held perception that government is dysfunctional, however, it may take more than one rate cut to alter the mood of consumers.

The Myer third-quarter numbers weren’t all that bad, given the circumstances. Total sales, once the categories Myer has exited or shrunk are taken out, were down 0.2 per cent, or 1.6 per cent on a like-for-like basis.

The commentary around the numbers, however, was somewhat more disconcerting. Myer described the third quarter experience as "mixed", but said there had been a significant deterioration in April, which had continued into the first few weeks of its final quarter.

It is no surprise that Myer’s best-performing states were Western Australia, South Australia and Queensland or that its poorest-performing states were Victoria and New South Wales, which have been hit hardest by the impact of the dollar and the collapse in consumer confidence on their industries.

The ongoing pressure on its sales and margins in a recessed and extremely competitive environment led Myer to downgrade its full-year earnings guidance from "no worse than 10 per cent below" last year’s $162.7 million profit to "no worse than 15 per cent" below that outcome.

Earlier this year David Jones shocked the market when it unveiled a 19.6 per cent decline in first-half earnings and foreshadowed a full-year slump in earnings of between 35 per cent and 40 per cent. The Myer commentary will inevitably create further concerns about its major rivals’ condition and, indeed, the outlook for the discount department stores and specialty retail sectors generally.

At least Myer has reduced its exposure to the segments most exposed to the downturn and price deflation – electrical goods, DVDs, music and the like – which have affected businesses like JB Hi-Fi, Dick Smith, Harvey Norman and Retravision most severely.

Myer’s Bernie Brookes is pinning his downgraded hopes on Myer’s mid-year stocktake sale, which traditionally generates most of its second half earnings. Last year’s sale was disappointing, with fourth-quarter sales 5.8 per cent lower than the same quarter of the previous year. Brookes hopes that changes Myer has made to its offer this year will produce a better outcome.

While the torrid external environment is buffeting all retailers, but department stores in particular, there is also a structural element to the pressures on traditional retailers. Online sales, while still only a little more than five per cent of total retail sales, are growing at 20 per cent-plus annual rates and the big traditional retailers have been slow to respond.

Myer is slightly more advanced than some of its peers and, with its massive Myer One loyalty program – which has more than four million members who account for a majority of its sales – has a base to leverage into an online channel as part of a "bricks and clicks" strategy.

Brookes has said previously he believes Myer could eventually generate 7-8 per cent of its sales – currently around the $3 billion a year mark – online. There are department store operators offshore who are doing double that rate and more.

A key to traditional retailers being successful online is to own or have exclusive control of key brands. Myer has been doing both, buying brands like sass & bide and Trent Nathan and, more recently, the womenswear label Grab. Brookes is on the lookout for more. Ownership and exclusivity enable some control over pricing and the ability to avoid channel conflict.

While it is off a very modest base, Myer would be encouraged by the early signs of success from its continuing heavy investment in its online platform and the IT platform and processes that support it. Brookes said today that online sales were continuing to grow and were more than 200 per cent above their level last year.

He’d also be mildly encouraged that trading in the recently refurbished Carindale store in Queensland is showing positive results. Myer’s Highpoint store in Victoria is about to experience a similar overhaul and it has two new stores, at Fountain Gate in Victoria and Townsville in Queensland, that will open soon to provide another boost to sales.

Without a major change in consumer sentiment and household spending on discretionary items, however, the context in which the big retailers are operating and the fierce and margin-compressing competition for the available sales that it has ignited is unlikely to improve significantly. There’s not much in prospect that suggests that change in context is likely to occur anytime soon.

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