Shoppers hands stay in pockets but Myer still confident

THE sales breakdown that accompanied Myer's profit result yesterday showed how big a hole retailers are in right now as external shocks here and overseas convince shoppers to keep their hands in their pockets.

Myer's sales slumped, stabilised and then slumped again in the year to July, and chief executive Bernie Brookes (pictured) says trading levels have been responding almost immediately to shifts in confidence.

Shocks to consumer confidence took many forms: interest rate rises in the first half of the year, weak employment numbers in recent months, renewed signs of economic stagnation in the United States, Washington's unseemly debt reduction drama in July, Europe's expanding sovereign debt crisis and the market plunges that accompanied almost all of those developments, to name a few.

They continued after Myer's balance date as the United States' debt was downgraded by Moody's and as global markets continued to slump. And last night after Myer reported its result another wave crashed onto the deck, with the Swiss banking giant UBS announcing that ''unauthorised trading'' in its investment banking division may have cost it $US2 billion ($A1.95 billion).

UBS shares plunged in early trading as the markets pondered the ramifications. The Swiss group has a relatively high capital ratio after mending its balance sheet in the wake of the 2007-2009 global crisis, and is capable of digesting a loss of the magnitude it has revealed. The blow to confidence, not only in UBS and its risk management but in the increasingly fragile European banking system, was more difficult to quickly assess.

Myer's sales were down 3.8 per cent for the year to the end of July and by 5.5 per cent on a same-store measure that irons out store expansions and new store openings, but it was a roller-coaster ride.

The department store group hit the wall along with all retailers in the second quarter of its financial year, after the Reserve Bank raised its cash rate from 4.5 per cent to 4.75 per cent on November 3, and the commercial banks boosted their lending rates by even more.

It was the seventh rate rise in just over a year, and it combined with floods and storms in Queensland and Victoria to ruin the Christmas trading period and the New Year sales that followed. Myer's sales on a same store basis dived by 7.4 per cent in the three months to January.

After that, Myer seemed to be stabilising, albeit it on a weak base. Sales were a less scary 3.1 per cent lower on a same store basis in the three months to the end of April. But in the final three months of the retailer's year to July sales again plummeted, by 7.9 per cent on a same-store basis.

The 3.6 per cent lower $162.7 million net profit that Myer revealed yesterday was within with February's lowered guidance for a profit drop of up to 5 per cent, but Brookes says the pressure is still on, as bad news continues to flow.

Myer will be booking about $48 million of new costs this financial year as it opens new stores and absorbs the cost of a new enterprise bargain with its employees. It expects same store sales to be down about 2.5 per cent: they are down about 3.8 per cent since July 31 compared with the same period last year, but the Christmas-New Year period is expected to be stronger than the 2010-11 season that was hit by floods and the Reserve's November rate rise.

It also predicts that net profit for the year will be up to 10 per cent lower than the $162.7 million profit it has just reported, and that's actually an ambitious target.

It assumes that trading conditions do not deteriorate further, for one thing. And it puts the weights on Myer to find new savings or higher profits to offset at least half of the $48 million in extra costs it is incurring as it expands its stores and absorbs higher employee costs.

Myer has to do this at the same time as it moves to attract more customers by boosting service levels, and Brookes says the group will be shifting more sales into its higher-margin house brands, continuing a clamp-down on shoplifting, and tightly controlling stocks and markdowns.

But cost micro-surgery wasn't supposed to be as crucial to earnings now, according to the plan Myer laid out when it floated in 2009. According to that plan, the group should be now harvesting higher sales growth and earnings growth from major store refurbishments including the revamp of Myer's Melbourne flagship store and from new store openings, in the Sydney suburb of Ryde and the Gold Coast suburb of Robina in 2010-2011 for example.

More stores are coming on stream, in Mackay and Townsville this year for example. So far however, revenue gains from expansion have been outweighed by the general trading downturn - and Myer's prediction that earnings will be as much as 10 per cent lower in 2011-12 implicitly assumes that the same thing will occur this financial year.

Brookes said yesterday that Myer was operationally ship-shape, and poised to stack on sales and profit growth when conditions improved.

There's also a new ray of light since Myer ruled off its books at the end of July, in the form of sharply lower expectations for a local interest rate rise. The Reserve Bank is probably on hold until mid-2012 at least, and could cut rates if the economy weakens.

The UBS announcement underlines however that left-field shocks are still rolling in, from debt-laden Europe in particular. The nightmare scenario for Myer and the retail industry is that there will be enough of them to drive sentiment and spending even lower in the months ahead, and during the crucial Christmas-New Year trading period in particular.