Sassy Myer bides its time

A slowing in the rate of Myer's sales decline and the maintenance of its full-year earnings guidance suggests that it, at least, thinks the environment for retailers might be stabilising, albeit at a lower level.

The big retailer's result – a 19.8 per cent fall in after-tax earnings – was disfigured by the cycling of $17 million of compensation last year for the disruption to its Bourke Street store created by its re-building and a $5 million one-off increase in depreciation.

Nevertheless, it was consistent with the experience of the sector generally as nervous and conservative consumers, the strong dollar, intense competition and the continuing emergence of the internet retailers combined to undermine traditional retailers' earnings.

The encouraging notes in the Myer result were its ability to hold its gross operating margin, which actually rose 44 basis points to 40.98 per cent, and the relatively modest 1.7 per cent decline in first-half sales.

It was within the sales numbers that there was a glimmer of hope for the second half, with second quarter sales down only 0.4 per cent. That improvement has, apparently continued into the first six weeks of the second half. Myer's exit from some electrical categories cost it $22 million of sales, so the underlying sales performance, after tumbling over the past 18 months, has stabilised.

There was also encouragement in Myer's commentary. The group has, despite the conditions, been investing heavily – about $26 million this year in improving its customer service. The first states to benefit from that investment were Western Australia and South Australia, which Bernie Brookes said today were Myer's best-performing states.

He'd also be pleased that the things he can control showed positive trends.

The continued growth in Myer's exclusive brands, which now represent 18.3 per cent of the group's sales, was cited as a contributor to the group's solid performance at the gross margin level and Brookes was quite excited by the performance of the recently acquired majority interest in the sass & bide business.

There was a reduction in promotional discounting despite the environment, shrinkage was down and Myer has a clean inventory position and its roll-out of direct sourcing offices to support its exclusive brands is ahead of target.

While the result was driven by current conditions, Brookes is also re-shaping the business for the longer term. Myer has closed two stores, decided not to proceed with a new store and is reducing the size of its store footprints and renegotiating terms with landlords wherever possible.

The old growth model of continually opening new stores has been abandoned – where once Brookes planned a network of more than 80 stores he now wants to hold the network to 75 stores.

Myer is also well advanced in developing its ‘omni channel' offering, which Brookes says is well ahead of the competition and which is already experiencing "exponential" growth. Myer has an advantage over most of the big retailers because it has only recently put in place a new state-of-the-art point-of-sale system and a new IT platform which will give it both fulfilment options and an ability to manage inventory across channels.

It also has, in its Myer One loyalty program, more than four million members and nearly two million email addresses that it can leverage in an online retailing environment, as well as a range of exclusive brands that provide some protection against purely price-driven competition.

Myer has dozens of programs running, with considerable internal and external support, as it moves towards the roll-out of a far more sophisticated online retailing platform. "We're embracing the internet," Brookes said.

It also has both the supply chain and the store network to be able to implement a ‘bricks and clicks' strategy.

Without the $22 million of one-off costs incurred in the first half, and with a number of new brands launched, continued growth in its more profitable exclusive brands, a full half-year's contribution from sass & bide and continuing benefits from the technology investments and the new CCTV system, Brookes is relatively confident about the second half.

He has maintained full-year net profit guidance at no more than 10 per cent below last year's $162.7 million, provided there is no further deterioration in trading conditions. If he can deliver that in the current environment, it would be a creditable achievement.