Myer: Result 2014

It wouldn’t be the first time Myer has disappointed investors. The stock has fallen 18% since releasing its full-year result but lost almost half its value since listing in 2009.

Revenue was flat at $3.1bn for the year to 26 July due to store closures and anaemic same-store sales growth of just 1.2% thanks to ‘subdued consumer sentiment and unseasonably warm weather’. The real issue, however, was rising labour, rent and refurbishment costs causing net profit to fall 23% to $99m and the board to cut the final dividend by 31% to 5.5 cents.

Myer isn’t doing itself any favours. Its online store was closed for a week after being overwhelmed last Boxing Day, while rival David Jones didn’t miss a beat announcing extra discounts on its own website to take advantage of Myer’s problems.

Myer has been slow to move online and it’s becoming increasingly vulnerable to factors outside management’s control, such as aggressive discounting by rivals, currency movements that encourage more online purchases abroad, and the influx of international brands to Australian shores, such as Zara, H&M and Sephora, among many others, which shows no sign of abating (see The department store era is over from 10 Feb 14 (Avoid – $2.59)).

Delivering what could be the final blow, South Africa’s Woolworths has foiled Myer’s best chance at long-term success – merging with David Jones – when it outbid the company’s offer by more than 50% (see SA Woolworths to buy David Jones from 9 Apr 14 (Sell – $3.93)).

Myer is now in a very precarious position. Margins and sales will be difficult to improve due to the added competition and investors may soon worry about the company’s balance sheet.

Net debt rose to $350m this year, but non-cancellable store lease liabilities total $3.3bn. What’s more, the company’s operating earnings (before rent) are roughly 2.0 times its $240m in fixed rental and interest expenses – which is uncomfortably close to the 1.7 times required by its banking covenants. If the company’s gross margin falls by just three percentage points next year, it could be in breach.

Myer’s share price has fallen 22% since The department store era is over from 10 Feb 14 (Avoid – $2.59) but the company still has an enterprise value roughly ten times its operating earnings. Since listing, the average has been around eight and we don’t think the current dividend yield is sustainable, nor does the share price offer a sufficient margin of safety.

The Myer empire has existed for more than a century. It's unlikely to survive a second in its current form and we continue to recommend you AVOID.