Digital sales are Myer's silver lining
As dark clouds continue to gather over bricks-and-mortar retailers, Myer shares rallied last week to close in on Morningstar's fair value estimate.
As dark clouds continue to gather over bricks-and-mortar retailers, Myer shares rallied last week to close in on Morningstar's fair value estimate.
The no-moat department store's share price surged 42 per cent on Friday, to highs of 60 cents, from lows of 42 cents on Wednesday. Management reported a full-year net loss of $486 million, with underlying net profit falling 52.2 per cent to $32.5 million.
Morningstar equities analyst Johannes Faul upgraded Myer (ASX: MYR) from "hold" to "accumulate" in February this year – from three-star to four-star in the new rating methodology. He also applied a fair value estimate of 66 cents, when it was valued by the market at 55 cents.
Morningstar expects Myer to reduce its floorspace by 25 per cent over the next decade.
The retailer's cost of doing business increased by 1.5 per cent, to the surprise of analysts, while operating gross profit declined by 2.9 per cent.
However, total sales were better than expected, down just 3.2 per cent for the year versus Morningstar's anticipated 3.7 per cent decline.
Despite a disappointing period of underperformance, Faul hung his hopes on Myers online sales. He expects this channel to dominate Myer's sales growth over the next five to 10 years as "consumers increasingly perceive online retailers as offering value and convenience".
Online sales were up strongly, improving the overall like-for-like sales figure to a decline of 2.7 per cent.
However, Myer isn't out of the woods. Faul is discouraged by Myer's increasing cost of doing business and decreasing sales, which caused the underlying net profit of $32.5 million to miss Morningstar's $40.2 million estimate.
Without the 34 per cent increase in online sales, he estimates like-for-like sales in the physical stores declined by about 5 per cent.
Faul would have liked to see management outline "tangible medium-term targets" on matters including the physical store footprint, sales growth, and earnings before interest and tax margins.
Myer's new CEO John King stated the company “will be focused on delivery and execution, not promises,” and none were given, Faul notes.
Morningstar expects Myer to reduce its floorspace by 25 per cent over the next decade, either by closing entire stores or handing landlords back only some of the space within stores.
Faul says this estimation is in line with other large-scale physical retailers, including Wesfarmers (ASX: WES), which announced the closure of 20 per cent of floorspace for its discount business Target over the next five years.
Faul believes ongoing consolidation of Myer's physical footprint will be increasingly important, as the online channel continues to dominate its sales growth.
However, this transition and the refurbishment of remaining stores comes at a cost – as much as $100 million annually, according to Morningstar.
Myer’s dividend remains suspended, with no final dividend declared. Faul cut Morningstar's fair value estimate by 5 per cent to 63 cents a share in response to the result.
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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