The battering Myer shares experienced today in the wake of its full-year results appears partly attributable to what it did last financial year and partly because of what it expects to do this year.
Myer shares fell about 9 per cent after it reported a 22.6 per cent slump in earnings to $98.5 million.
The fall in earnings wasn’t unexpected; it had been well-flagged. But it would seem that the market was taken somewhat aback by the 57 basis point decline in gross margin as Myer sacrificed margin to maintain its sales base, particularly in the second half.
Chief executive Bernie Brookes had previously made it clear that a combination of rising labour costs, the investment in building out its omni-channel strategy, the impact of the sliding dollar on the cost of its Myer exclusive brands strategy, increased occupancy costs and the refurbishment of key stores during the year would have an impact on the result.
The 'glass half-full' view of the result that the ever-optimistic Brookes would probably prefer was reflected in a 1.2 per cent increase in comparable store sales against the backdrop of intensifying competition and a weak and fluctuating retail environment.
It may have cost the company gross margin, but Myer has held onto its sales base amid competition from a growing horde of offshore retailers, the growth in online retail and the prospect of a revitalised David Jones under its new South African ownership.
The potential (and need) for South Africa’s Woolworths to leverage its enlarged southern hemisphere presence and buying power to make sense of the $2.2 billion it paid for David Jones would be dominating the thoughts of Myer’s restructured leadership.
It may explain why Brookes outlined an accelerated investment program for this financial year that will impact the group’s cost of doing business. After increasing 3.3 per cent last financial year, he expects it to increase a further 3 per cent this financial year.
Myer plans to invest $35m to $50m in its omni-channel strategy, spend more on training, developing and rewarding its staff, expanding its exclusive brands strategy and on refreshing its brand while maintaining capital investment in the business at about $80m.
It really has no alternative. The merger of equals it proposed to David Jones, had it not been killed off by Woolworths’ takeover, might have offered a cost and synergies-driven escape from the mounting pressures of the current competitive and economic environment. However, it now faces a potentially strengthened major competitor.
Brookes knows that in Ian Moir and the team he has put in charge of the Australian business, led by former Country Road chief executive Ian Nairn, that he faces a formidable competitor. Woolworths needs to continue to expand David Jones’ sales base to justify the purchase price.
At the same time, the invasion of foreign retailers shows no signs of abating. While the slippage in the value of the Australian dollar might blunt the impact of offshore online retailers at the margin, Brookes knows that is a channel that can only grow. Hence Myer needs to improve and expand its own online offer and integrate it better with his physical network.
With his own store brands strategy to counter Woolworths' plan to significantly lift the share of store brands in David Jones’ sales -- Myer’s exclusive brands account for more than 20 per cent of its sales -- about two-thirds of its sales associated with its loyalty program and the core stores in the network refurbished, Brookes has some foundations to work with.
He seems optimistic than even in the fragile retail environment, he can generate earnings growth through stronger sales growth and by fine-tuning the amount by which he increases operating costs.
Whether or not he can get both top and bottom-line growth this year, he really has no alternative but to try to re-position the business, strengthen its basics and quicken the pace of change in response to the tough and evolving dynamics of his sector.
There was always a limit to which Brookes, who has had a very good record on costs, could rely on further cost reductions as a lever to protect earnings. Myer appears to have reached that limit last year, so now the plan is to invest in pursuit of future growth.