Myer scores well in the resilience department

In a very difficult year for retailers and department stores in particular Bernie Brookes may not have been satisfied with Myer’s results but he would have been relieved.

Myer’s earnings came in somewhat better than Brookes had foreshadowed earlier in the year – when the guidance was for an earnings decline of up to 15 per cent – thanks to a much-improved second half.

With significant uncertainty as to whether the general blip in retail spending around the end of the conventional financial year was an aberration caused by the Gillard government’s cash splash – the compensation to households for the introduction of the carbon tax – Myer has been careful not to provide guidance for this financial year.

The breakdown between the group’s halves, however, does explain why Myer was so cautious when it reaffirmed its guidance after its third quarter sales report in May.

It full-year earnings before interest and tax were down 11.2 per cent but its second half EBIT was down only 4 per cent. On an after-tax basis earnings were down 19.8 per cent in the first half but only 3.3 per cent in the second.

Where full-year sales were down 1.3 per cent third quarter sales were down 0.9 per cent and fourth-quarter 0.3 per cent. On a comparable stores basis final quarter sales were actually up 0.3 per cent.

Beneath the headline numbers there were indicators of good management, with Myer’s gross profit margin rising 105 basis points to 41.31 per cent.

In recent years Brookes has focused on driving growth in the number and the sales of brands exclusive to Myer. Not only are they higher-margin but in the longer term they provide protection against the growth in online shopping because competitors don’t have access to the brands and therefore can’t under-cut Myer on price.

Sales of those exclusive brands grew by $31 million and they now represent 19 per cent of Myer’s overall sales.

Brookes was also pleased with the reduction in "shrinkage" to world best practice levels of less than 1 per cent of sales, a reduction in overall markdowns and the impact of Myer relatively new direct sourcing network.

A key to Myer’s ability to create a meaningful online presence of its own is its Myer One loyalty program. It added more than 500,000 members during the year and now has 4.7 million members and a significant asset it can leverage into its "omni-channel" offerings.

Brookes may have been a relatively late convert to the potential of online retailing but Myer has been racing to make up for lost time. It now has 30,000 SKUs online – more than double its offering in May – has doubled its online sales during the year and experienced accelerating growth in online sales through the year.

Brookes has a target of generating about 8 per cent of Myer’s sales online within four or five years – approaching the equivalent of a new flagship store, although the offshore experience of those traditional department store groups that have embraced online retailing suggests that might be a conservative target. The "bricks and clicks" model of retailing is quite a potent one when well-executed.

While Brookes appears to be getting quietly excited about the potential of Myer’s developing online presence he’s still opening new physical stores and refurbishing existing stores and, despite the difficult external environment, sticking to his plan to invest quite heavily in extra staffing to improve the service levels within them.

Service within the department stores has been a major source of customer discontent in recent years as the operators have come under pressure to cut costs in response to the recessed retail conditions. Brookes sees the investment in additional staff and training as a potential competitive advantage.

Neither Brookes nor his peers can do much about the retail environment (which Brookes describes as the worst in a quarter of a century) or the conservatism of consumers but the Myer result is, in the circumstances, a creditable one. The department store operators have no choice but to try to improve the basics of their businesses while awaiting some eventual pick-up in consumer spending.

Myer does, at least, have a conservative balance sheet and generates strong cash flows to get it through to that point, if and when it emerges.