Myer's primed cash registers

Bernie Brookes might have preferred the quieter life he and Myer experienced during its period of private equity ownership but he has good reason to be satisfied with Myer's first full-year result since its controversial listing late last year.

Myer comfortably beat its prospectus forecasts of earnings and margins, if not its sales forecast, and has declared larger than forecast dividends in a difficult and intensely competitive period for retailers generally and department stores in particular.

Four months ago, when Myer shares closed below $3, Brookes was battling market disenchantment. Today, with the shares at one point touching $4, the group is at least within sight of its $4.10 a share float price and if external conditions remain stable Brookes has a lot to be optimistic about.

Until Myer can generate sales growth the market will remain sceptical that Myer's resurgence is anything but a cost-driven story with modest growth prospects. There were, however, excuses for the flat sales (up 0.7 per cent) last year and good reasons for Brookes to be confident he can generate some momentum this year.

In the year to July Myer, like most retailers, was cycling stimulus-inflated sales numbers – more than three per cent in the second half of the previous financial year. Its flagship Bourke Street store – which traditionally generates about 10 per cent of the entire group's sales – was a demolition site. It had no new store openings in the period.

All that's about to change, or at least should be. The cycling is almost behind it. By Christmas seven of the nine floors at Bourke Street will be open and Myer will also have access to space in its former Lonsdale Street store to take full advantage of Christmas trading. It will get a contribution from two new stores, with another dozen in the pipeline over the next four years. Refurbishments of its existing network will continue.

Thus, with the "transformation" phase largely behind him, Brookes will have clearer air in which to demonstrate to the market that there is a growth phase for Myer; one driven by top line as well as bottom line growth.

Mind you, Brookes has done a very good job of improving the basic of the Myer business and improving its profitability despite the flat sales. Gross margin improved 45 basis points from the previous year and Myer's retail margin of 8.3 per cent bears no relationship with the meagre 2.3 per cent he inherited. Myer's cost of doing business was down another 52 basis points to 29.43 per cent – it is now more than 300 basis points better than it was four years ago.

Having lowered the cost base and variablised costs, Brookes is looking for earnings leverage as the sales base starts to grow. New point of sales and CCTV systems and more "Myer exclusive" brands and direct sourcing (and a strong dollar) will help exert continuing downward pressure on costs.

Brookes isn't over-promising, partly because there is one very strong quarter of stimulus-driven sales growth (5.2 per cent) to go, as well as $10 million of costs associated with Bourke Street and the point of sales system. He's forecasting net profit growth of between 5 per cent and 10 per cent this financial year.

With the bulk of the massive $540 million renovation of the group behind him, however, Brookes is now moving into a period where the focus is shifting from fixing a broken business to growing one that has been largely repaired.