THE DISTILLERY: Myer in the mire

A big day yesterday for corporate news. Retailing was the focus, but we also had two new CEOs revealed, one in surprising fashion. While JB Hi-Fi did well, its sales were lower than forecast, but the market went 'whew' because some investors had feared worse. Not so lucky was Myer, the most benighted float we have had in recent years. The $4.10 issue price is looking even further away after yesterday's earnings downgrade. Our jotters fell upon Myer's update and mauled the retailer and its CEO. Nothing was spared.
 
Fairfax's Adele Ferguson said this morning: "The Myer boss Bernie Brookes may blame the shock profit downgrade on floods, rate rises, price deflation and a particularly horrendous January, but the truth is his bullish forecasts for this year were always going to struggle once he restarted the discounting war well before Christmas. If he is wondering why the share price fell so far – down 11.5 per cent – it is less to do with macro factors and more to do with credibility issues and a decision by the company to divert its strategy into speciality (sic) retail by buying 65 per cent of fashion outlet sass & bide for $42 million. The problems with Myer are myriad, including a portfolio of too many stores. But a key question from the downgrade is why it took Brookes and the board so long to fess up." 
 
Ian Verrender took a similar line in the Fairfax broadsheets: "Time and patience ran out for Bernie Brookes yesterday. The man once hailed as a retail genius, who helped steer a loss-making basket case to profitability, who tipped his previous employers into the deal of the decade has been left friendless by an angry investment community. You could argue that it's not all his fault. But by allowing himself to be press-ganged into Myer's over-hyped 2009 float, Brookes created a rod for his own back. For it was obvious back then, to anyone who cared to look beyond the vital statistics of the Myer ambassador Jennifer Hawkins, that the numbers on the retail chain simply didn't stack up. They certainly haven't stacked up since the float. After being flogged to hapless punters at $4.10, the stock tanked on day one and has never come anywhere near the sale price."
 
Malcolm Maiden wrote yesterday on the smh.com.au website that Myer boss Bernie Brookes: "...blames a cocktail of problems for the downgrade, and they all fall in the category of weak consumer demand, and the price-tag competition it is generating among retailers. Sales declined significantly in January after the Christmas period, and Brookes tags that on the November interest rate rise, and higher other costs of living including the cost of utilities such as electricity, health care and petrol. Sales are also being hit by price deflation, he says – that's showing up on retail sales numbers as the strong Australian dollar reduces the wholesale price of goods bought overseas, some of which is passed onto shoppers. And he says the inclement and unusually cool summer on the eastern seaboard has also resulted in subdued demand for summer clothing and fashion-wear, and says the recent floods and the Gillard government's proposed flood levy will compound the problem. None of these problems is unique to Myer, and the group is not the only retailer to note them. Its shares are being hit particularly hard however because of the way the downgrade undermines the sales and profit growth trajectory that was set at the time of the float."

Stephen Bartholmeusz said in Business Spectator: "The market's response to the downgrade was quite savage, given that it has been obvious for some time that all the discretionary retailers are being heavily impacted by a confluence of adverse events and influences. Myer's experience isn't an isolated one and the market immediately marked down its rival, David Jones, as it digested the broader implications of the Myer announcement. Target's recent sales results, for instance, were down 3.1 per cent for the half (3.3 per cent like-for-like) and 4.2 per cent in the second quarter, and Big W reported a 2.8 per cent fall in first half sales, while Premier Investments chairman Solomon Lew has criticised the November rate increase for having a clear and demonstrably negative impact on already fragile consumer confidence."

Tim Boreham wrote on The Australian's website yesterday: "Myer has cast a pall over the retail sector with a savage profit downgrade on the back of a "significant, unexpected and rapid" decline in January sales, vindicating those who have had nagging doubts about the stock since its overpriced November 2009 listing. It will take more than a $42 million investment in women's sass & bide label, also confirmed this morning, to window-dress Myer's short-term prospects. Take the much-loved grunge barn JB Hi-Fi, which slightly fell short of first-half earnings expectation this morning, but still posted a 15 per cent profit surge to $87.9 million. JB's sales growth was uncharacteristically negative – down 1.5 per cent on a like-for-like basis – but the vital rider is that sales soared 9.9 per cent in the previous December half."

And Terry McCrann compared the performance of the two reporting retailers yesterday, Myer, of course, and JB Hi-Fi: "The Myer and JB numbers captured the dynamics of the non-food retail environment – providing a backdrop to the overall retail sales figures and a contrast to the shooting war in food. JB's numbers looked good and were still fabulous. Sales revenue up 8 per cent, operating profit up 14 per cent, and so the already impressive operating profit margin was up from 7.2 cents to 7.5 cents in the sales dollar. The deflation in the Myer numbers are not quite as voluntary or as effective. It's also cutting prices to chase sales. In its case, it was unable to translate that into positive sales revenue growth. But the slightly different pricing dynamics of Myer and JB – prising dollars out of reluctant consumers – are a world away from what's happening in your supermarket."

On the change at Asciano, John Durie said on The Australian's website that it resulted from: "A personality clash between an entrepreneurial chief and old-school chair has resulted in a revolution at Asciano, with company founder Mark Rowsthorn quitting. He will be replaced by 55-year-old former DHL boss John Mullen, who – while being a former boss of TNT and on several high profile boards including Telstra – is not widely known in financial markets. Mullen commuted to Europe to run DHL from 2003 to 2009 and, reportedly having tried life as a non-executive director, wants to return to an executive job. The move puts a barrier in front of new Asciano finance chief Angus Mackay, who left Foster's to join the company specifically to advance his case to be the next chief executive. Chairman Malcolm Broomhead argues that, while Rowsthorn was the ideal person to run the company, it is now time for a different style of leader." This morning Durie wrote: "The market welcomed the move in part because it raised speculation the new team would be more open to a sale of its container ports and it underlined market backing for Broomhead. In the scheme of things, Broomhead would appear to have stitched up Rowsthorn to benefit shareholders. But whether it is a benefit to chop Rowsthorn just as the blue sky is appearing as he breaks new ground on the Queensland coal fields remains to be seen."

A busy Adele Ferguson wrote on the smh.com.au website yesterday: "News that Asciano boss Mark Rowsthorn was moving on was not a surprise, but the timing sure was. After re-signing his contract in June last year and taking a $900,000 one-off signing and retention bonus for the privilege, the feeling was he would stick around for at least another year or two. Not so. The board hit the button on succession planning a few months later and found John Mullen, a global logistics executive whose latest executive role was head of logistics giant DHL until he resigned in 2009. The market welcomed the departure of Rowsthorn by lifting the share price 1.8 per cent on a flat day. And the Australian Financial Review says: "The surge in the Asciano share price in the wake of the appointment of John Mullen as chief executive is as much about the quality of the new boss as it is about the hope that chairman Malcolm Broomhead will repeat the magic he performed at Orica."

But the harshest line came from The Australian's Bryan Frith: "The dumping of Mark Rowsthorn as chief executive of the transport and logistics group Asciano was long overdue. He should have gone 18 months ago when the company suffered a near-death experience and was forced into a highly dilutive $2.35 billion non-renounceable equity issue and institutional placement to reduce its crippling debt load, which resulted in a massive transfer of wealth from existing retail shareholders to newcomer institutions. Instead, Rowsthorn was deemed to be vital to Asciano's future and he was offered a special deal (effectively a free option) designed to enable him to avoid dilution and retain his then-10 per cent shareholding in the company." No sympathy there. 

Fairfax has a new CEO, Greg Hywood, and a busy Malcolm Maiden also wrote yesterday on the smh.com.au website that: "In an email to Fairfax staff announcing the appointment today, Fairfax chairman Roger Corbett said the new CEO "had to have journalistic skills," and a "feel for content and credibility in the space... content is at the heart of the company". Corbett also said that the new CEO needed to have "an implicit and intuitive understanding of the digital world" and said Hywood ticked that box, too. Hywood's journalism background is in print. But he will signal his appreciation of the way the internet has transformed the media world if, as expected, he appoints Fairfax's digital division boss, Jack Matthews, to run the metropolitan media division. One thing they will be watching closely, however, is whether the plan that McCarthy gave the board is modified, and if so, to what extent."

Business Spectator's Stephen Bartholomeusz also looked at the two new CEOs announced yesterday: "There were two new chief executives of two major listed companies announced today. One was widely anticipated, the other wasn't, but probably should have been. From the moment Greg Hywood was appointed acting chief executive of Fairfax Media after the abrupt departure of Brian McCarthy there was a sense of inevitability about his permanent appointment to the role. There was, however, no obvious forewarning that Asciano's Mark Rowsthorn was about to be forced out of the company that he helped create and which he has run since the ill-fated spin-out of a debt-laden Asciano just ahead of the financial crisis." All this productivity from some of our leading columnists.

The AFR says that Myer's post float problems will be a lesson to private equity types: "It will be of absolutely no consolation to the Myer shareholders who are down almost 20 per cent on their investment in the retailer, but at least Myer's rough trot is providing some invaluable insights to the private equity types behind some of the big initial public offerings in the wings." So is that why there's a delay to the float of Nine? " The AFR says that: "Private equity firm CVC Asia Pacific has pushed the float of Nine Entertainment Co back to June or July at the earliest, as executives at the media group work to lift earnings in its ACP Magazines division."

And The Australian took a similar lesson from the Myer update for new private equity floats: "For private equity vendors seeking to hive off retail assets this year, Myer's dreadful performance – underscored by a profit downgrade yesterday – will have sent a tremor through their hearts. A number of retail initial public offerings are in the pipeline this year, including Archer Capital's Rebel Group and Champ Private Equity's Manassen Foods, while Pacific Equity Partners has Deutsche Bank and UBS working on a review of exit options for its Collins Foods Group investment."

David Uren wrote in The Australian this morning: "Wayne Swan has warned that the national economy could contract for the first time since the global financial crisis, as a result of the $7 billion collapse in Queensland's coal and agricultural exports caused by the floods and Cyclone Yasi. Despite the gloom, the Treasurer has vowed he will not deviate from returning the budget to surplus by 2012-13, declaring "fiscal discipline is the the rock on which we build." Ah, didn't growth fall in the December, 2008 quarter?

Interesting deal: Online company AOL buying The Huffington Post website for $US315 million. The Financial Times reports: "The Huffington Post was started with backing from several liberal supporters, including the comedian Larry David, the creator of Seinfeld, and David Geffen, the film and music billionaire. Since the site was launched in 2004, it has built a monthly audience of nearly 25 million monthly unique users who visit the site for its blend of comment, blogs and news – which often comes from other sources around the web... By combining HuffPost with AOL's network of sites, thriving video initiative, local focus, and international reach, we know we'll be creating a company that can have an enormous impact, reaching a global audience on every imaginable platform,” Ms Huffington wrote on her site on Sunday." That's off the list for possible buys for the new Fairfax CEO, then.