A quarterly sales increase of 2.1% seems trifling on the face of it. But market expectations matter in investing, and for Myer they remain low.
A revenue growth rate of just 2% would be poison for Seek shareholders for example. But it’s perfectly acceptable for Myer, a business many thought (and some still think) doomed. Myer’s share price jumped on its third-quarter sales results on Thursday, putting it bang on the $1.25 upgraded buy price we set in Myer: Moribund no more? on 21 March.
The number that mattered most, though, was same-store sales growth of 3.4%. This was higher than the 2.1% nominal growth because it reflects the ongoing reduction in Myer’s selling space. Confirming management’s focus on productivity, sales per square metre rose 5.1% in the quarter. Higher sales from less space should eventually translate into greater profitability.
Decent quarterly sales numbers
New Myer making a difference
Election and seasonal weather uncertainty
For a time it looked like an unseasonably warm autumn might derail Myer’s plans, so these numbers are reassuring because same-store sales grew 3.4% despite the unfavourable weather. Growth would presumably have been better had March and April been shower-soaked rather than sun-filled.
So what drove these numbers?
Simple – the New Myer strategy. Myer and its concession partners have continued rolling out new ‘wanted’ brands. For example, 13 brand rollouts each of Seed and French Connection were undertaken during the quarter, as well as 10 of Mimco and five of Topshop Topman. Myer has also boosted customer service in flagship and premium stores. As we explained in Is Myer still a pariah?, ‘new’ matters – and it’s already attracting customers.
It’s still very early in the turnaround. In fact the five-year, $600m capital expenditure program outlined last year is only just beginning. This year is important because significant capital expenditure will be directed to Myer’s ‘premium’ Warringah store, which is currently closed for refurbishment.
When it reopens before Christmas, customers (as well as shareholders and analysts) will get their first taste of what a New Myer store looks like. Before I was booted off the ‘insular peninsula’ twenty years ago, I remember the Myer store at Warringah Mall store as being dowdy and uninviting. Upon reopening it will be smaller but more upmarket, better reflecting the high income nature of the area.
On the conference call, management confirmed it still expects to meet its 2016 underlying net profit forecast of $66m–72m, not that any one year matters much. There will, however, be $20m–30m of New Myer implementation costs this year which implies a second-half loss. We’re still expecting Myer to declare a dividend for the period, however.
Of course, we’re also in election mode. Management noted that the 2 July federal election falls during its mid-year clearance, a key selling period for the company. With warmer weather continuing into May in some parts of the country – including Sydney – Myer could do without the election uncertainty as well.
Boiling it all down, quarterly sales numbers, unseasonal weather and elections are just ‘noise’. After last year’s capital raising, Myer’s balance sheet should be robust enough to handle a poor year or two while the new Myer strategy is rolled out.
Myer still looks very good value, although bear in mind that retailing is a difficult business at the best of times. At least these sales numbers provide some comfort that the turnaround strategy is starting to make a difference. SPECULATIVE BUY.