Third profit hit triggers selloff, fears of more pain in store
Some analysts have also been quick to take the company down a peg following the release of its earnings result, reducing their profit forecasts for fiscal 2014 and lowering Myer's valuation.
A standout complaint came from Citi analyst Craig Woolford, who, after going through the details of the result, said Myer needed to increase its staffing levels at its department stores by as much as 10 per cent to generate a sales boost.
Shares in Myer on Friday closed down 4 per cent to $2.66.
A day earlier, Myer shares fell more than 5 per cent when the retailer unveiled an 8.7 per cent drop in full-year profit to $127 million - its third-successive annual profit slide.
But shareholders were also disappointed by the outlook provided by Myer boss Bernie Brookes, who warned of weaker sales for the next six months and another profit fall for 2014. Profit growth would not return until 2015, he added.
UBS analyst Ben Gilbert kept his rating on Myer as "neutral" but cut his 2013-14 pre-tax earnings target on the company by 20 per cent and earnings per share target by 18 per cent.
"While on a headline basis Myer looks attractive into 2014-15 and offers significant leverage to an improving consumer backdrop, we believe a significant level of uncertainty remains, particularly around the projected uptick in fiscal 2015 earnings," Mr Gilbert said.
Mr Woolford, who downgraded Myer to a "sell", noted Myer's profitability continues to decline: "In 2012-13, cost rose faster than sales and the same outcome is likely again in 2014."
He forecast earnings per share to fall 5 per cent this financial year.
"In our view, staffing levels need to rise significantly to meaningfully improve sales," he said.
"Sales are 5 per cent lower than five years ago, even though there are more stores."
Mr Woolford said the real challenge for Myer was growing sales faster than costs. "It's not easy, but entirely plausible. In our view, staffing needs to rise by 10 per cent as a precursor to better sales growth."
He said rising costs were a "fact of life", with Myer's cost of doing business likely to rise 4 per cent or 5 per cent in 2014.
"Online and new stores will help, but refurbishment disruptions and closures hurt. The company has signalled a focus on driving sales per square metre. If there are early signs of success, we would become more positive on the stock."
Citi has downgraded the stock and set a target price of $2.40.
"The only saving grace we see for Myer is that the stock has a better price to earnings relative valuation than other large ASX-listed discretionary retailers," Mr Woolford said.
Frequently Asked Questions about this Article…
Myer shares fell because the retailer reported an 8.7% drop in full‑year profit to $127 million, missed market expectations and issued a dour outlook for 2014. Analysts also cut forecasts and some downgraded the stock, triggering a sell‑off; shares closed down 4% to $2.66 after the update.
Myer reported a full‑year profit decline of 8.7% to $127 million, marking its third successive annual profit slide, according to the company’s earnings release covered in the article.
Myer’s management warned of weaker sales over the next six months and forecast another profit fall in 2014, saying profit growth was not expected to return until 2015.
Citi analyst Craig Woolford downgraded Myer to a ‘sell’ and set a target price of $2.40, highlighting declining profitability and recommending higher staffing. UBS analyst Ben Gilbert kept a ‘neutral’ rating but cut his 2013‑14 pre‑tax earnings target by 20% and earnings‑per‑share target by 18%, citing uncertainty around the projected 2015 earnings uptick.
Key risks include rising operating costs (Citi expected costs to rise about 4–5% in 2014), refurbishment disruptions and store closures that hurt sales, a multi‑year decline in sales (sales were reported 5% lower than five years ago despite more stores) and uncertainty over whether projected profit improvements in 2015 will materialise.
Potential positives cited in the article are growth in online sales and new stores, successful improvements in sales per square metre, and early signs that refurbishment and other initiatives are increasing sales — any of which could make analysts more positive on the stock.
Citi’s Craig Woolford argued Myer may need to raise staffing levels by as much as 10% to meaningfully boost sales. While increased staffing could support higher sales, it would also raise costs — a balance Myer needs to manage to improve profitability.
Investors should monitor quarterly sales trends (especially sales per square metre), online sales growth, progress on store refurbishments and openings, management cost guidance, and any analyst revisions or target‑price changes (Citi’s $2.40 target and UBS adjustments were highlighted) as signs of recovery or further downside.
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