Retail companies face some of the most challenging conditions they've seen in decades, as alluded to recently by Richard Umbers, CEO of Myer (ASX: MYR), who anticipates a "wave of change" in consumer and competitor behaviour.

"We interpret [this] as the continuing migration of consumers to e-commerce, and the arrival of Amazon to our shores," says Morningstar equity analyst, Johannes Faul.

He expects Amazon will "throw a further curve ball or two when it physically enters the Australian market, which we anticipate before Christmas 2018".

Last month, Myer posted sales and underlying net profit after tax of $3.2 billion and $67.9 million, respectively, for FY17--in line with Morningstar's expectations.

According to AAP reports, Myer has dropped the sales targets it set as part of its much-vaunted turnaround plan after unveiling another weak set of figures to investors.

Umbers says average sales growth of more than 3 per cent between 2016 and 2020 was no longer achievable at the department store chain because of stiff competition and weak consumer spending.

Even in the context of a spat with its largest shareholder, Solomon Lew's Premier Investments (ASX: PMV)--who recently criticised Umbers' strategy and Myer's flagging performance--the chief executive is sticking to his "New Myer" turnaround plan despite a 2.8 per cent decline in first-quarter sales.

"A focal point of management is to strategically position the business to successfully compete in an evolving competitive environment," says Morningstar's Faul, who believes at current prices, the shares are slightly undervalued.

"The firm delivered significant improvements in fiscal 2017, particularly on its online channel, as well as reducing its costs of doing business," he says.

Online sales grew by 41 per cent over the year, with high online penetration in the entertainment and home categories.

"However, management is behind on delivering on its target metrics and conceded progress has been slower than expected," Faul says. Average sales growth of just 1 basis point during the first two years of the turnaround strategy is well below the 3 per cent target set over five years.

On the upside, Faul expects Myer's online channel sales to gradually increase, offsetting a decline in brick-and-mortar sales--amplified by store closures. The firm announced its plans to close three further stores by fiscal 2020, bringing the total number of stores to 59.

The first six weeks of fiscal 2018 were below Myer's expectations, but management believes the weak start to the year is reflected in the consensus figure.

Morningstar maintains its fair value estimate of 80 cents per Myer share, slightly above its share price of 74 cents as at 3pm on Wednesday.

Clothing and kids

Another no-moat retail stock, Premier Investments has also struggled in an environment of low consumer confidence, which has weighed on apparel sales.

"However, the group's medium- to long-term growth trajectory is intact, and we maintain our $14 fair value estimate," says Faul, estimating earnings per share growth of 11 per cent over the next five years.

Premier operates retail apparel brands Just Jeans, Jay Jays, Portmans, Jacqui E, Dotti, and Peter Alexander. It also owns Smiggle, which sells a wide range of stationery and ancillary products targeted primarily at children, and is the company's key growth business.

Morningstar estimates average sales growth of 24 per cent for Smiggle over the next five years. The brand has continued its international store roll-out in fiscal 2017, and together with strong like-for-like sales growth, increased total sales 29 per cent to $239 million, says Faul.

"More than half of the Smiggle stores are now located overseas. We expect this trend to continue with the expansion into new overseas growth markets."

He believes there is scope for the business to more than double the current UK footprint to 277 stores over the next decade, but expects most growth to be driven from expansion into new markets.

"This enables the group to learn from and build on previous experiences, helping to de-risk its growth strategy," Faul says.

Premier's other growth brand, Peter Alexander, is tipped to increase sales by a compound annual growth rate of 14 per cent to $284 million in fiscal 2020--above guidance of at least $250 million.

Faul expects 39 additional Peter Alexander stores to open by fiscal 2020 and to drive sales growth together with store expansions and refurbishments.

Across the group, he also emphasises online sales, which were split out for the first time in this latest result and accounted for 6.2 per cent of Premier's total sales in fiscal 2017.

"This was above of our previous 5 per cent estimate, with the online sales growth rate even accelerating to 44 per cent from 40 per cent a year prior," Faul says.

"This is important, as we expect most of the incremental sales growth in categories with high online penetration such as apparel to be captured by e-commerce."

With arguments both for and against these stocks, they are well-capitalised businesses with strong track records in the retail sector. Though of course, past performance is no guarantee of future success, and investors' individual circumstances should be considered before making any financial decision.

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Glenn Freeman is a senior editor at Morningstar.

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