Myer is Australia’s version of the Facebook float. Like Facebook, its share sale was priced too aggressively, at $4.10 a share in November 2009. Its chief executive, Bernie Brookes, has been under pressure from the get-go.
Facebook shares were 18 per cent below their $US38-a-share float price yesterday but Myer makes that look like a papercut. Its shares have never closed above $4 a share. They hit $1.93 at the end of last year, and are back in touch with that low after falling by 17¢ or almost 8 per cent yesterday to $2 after Myer’s profit warning.
Myer is dealing with a protracted consumer strike, like other retailers who sell stuff instead of food or services. But there’s a related issue that could dog the shares for years: the simple earnings growth strategy that Myer had when it floated is dead. Brookes has come up with another plan that can work, but it is more complicated, and more risky.
The department store group was acquired by a private equity consortium led by TPG in mid-2006, installed Bernie Brookes as chief executive, and put a two-stage plan in place. In stage one, Brookes would get Myer working efficiently. Stage two, scheduled for after a float, would see Myer expand its physical footprint, creating sales growth that would cascade down to the earnings line.
Brookes hit the ground running. Capital expenditure averaged $58 million a year in the five years before he arrived, and he spent more than $600 million in the next five years on store upgrades and the construction of Myer’s new flagship store in Melbourne’s CBD, supply chain improvements and new information technology. He pumped up the MyerOne loyalty program, and moved the store offer more heavily into Myer-owned and controlled brands that generate higher margins, and reaped a rich reward.
Earnings before interest and tax were 3.9¢ in the sales dollar when Brookes took over, the sort of margin that even a supermarket would consider ordinary. They hit 10.1¢ soon after Myer listed. EBIT was back down to 8.2¢ in the dollar in the first half of the present year to July, but that is still solid.
Sales in 2007, 2008 and 2009 were static at $3.3 billion, but Brookes had made every dollar Myer took in more valuable. The scene was set for stage two: a sales surge on the back of 15 new stores, taking the chain out to 80 stores.
Stage two remains on the launching pad, however, grounded by the consumer downturn, and Brookes’s response to it.
Sales were $3.16 billion in the year to July last year, and in the first half of the present year they were down 3.5 per cent, and by 5.2 per cent on a like-for-like measure that ignores store openings and closures.
Yesterday’s news was that sales in the 13 weeks to April 28 were down 0.9 per cent from the third quarter last year. Like-for-like sales were 2.1 per cent weaker, and the downturn accelerated in May.
In March, when he announced a 19.8 per cent slide in net profit to $87.3 million, Brookes stood by Myer’s earlier prediction that full-year earnings would not be more than 10 per cent below last year’s profit of $162.7 million. Yesterday he said the decline could be as steep as 15 per cent: that would leave earnings at $138 million.
He sees no end to the consumer strike that is belting merchandise and fashion retailers. Investments to expand staff on the shop floor and continue the rollout of an integrated ”clicks-and-mortar” online and in-store retailing strategy will continue, but Myer’s expansion plan has already shrunk.
Brookes is closing underperforming stores as well as opening new ones, and shrinking the existing stores as he modernises them. The group will expand to 75 stores instead of 80, do it by 2016 instead of 2015, and its combined floor space will remain at about 1.2 million square metres: where it was in 2009.
The plan is to drive sales per square metre higher by converting more visits to sales, booking higher value sales and multiple sales when they do occur, and by leveraging a growing internet presence.
Brookes said yesterday that key measures of profit density were improving, and it would have been irresponsible to press on with the full-blown store expansion plan after consumer demand turned down.
But instead of expanding Myer’s sales and earnings by adding selling space as planned, Brookes is now micro-managing for earnings growth. It is more complicated and labour intensive, and the online strategy is the biggest wild card.
Like all the big local bricks-and-mortar retailers, the group’s online sales are low, at 1 per cent of total sales at present. The best overseas clicks-and-mortar exponents are near or past 10 per cent. Brookes says 10 per cent is doable, but he isn’t committing to a deadline. Shoppers who are switching to internet shopping won’t wait for him if he is slow.