Myer: five stars and poised for the rebound

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Lex Hall: 10 years ago, Myer was trading at about $3.50. These days, it's down around 29 cents. What does the future hold for Australia's largest department store? I thought today I'd check in with Morningstar analyst, Johannes Faul, to get his take.

Hi, Johannes.

Johannes Faul: Hey, how are you, Lex?

Hall: I'm well. Thank you. I'm probably better than Myer has been going. How has it been faring, particularly in light of what's happened with COVID?

Faul: In regards to the share price over the last decade, obviously, consumer spending is shifting away from department stores. That's been an ongoing structural trend. And we believe that trend is going to continue, gradually continue over the next decade. However, for Myer, I think, they'll be able to navigate that and succeed in that environment, at least more so than the share price currently suggests.

On COVID, interestingly enough, like most retailers, Myer fared all right in the environment. And they just posted a solid profit over last six months, which was obviously helped by subsidies from the landlords and from the government. However, our main concern especially going into the COVID era, so to speak, late March, early April, pretty much a year ago was that their balance sheet was stretched and there was risk there that they might not meet their obligations or breach their covenants. Our view back then was they'll survive, and the stakeholders will come to the table, be it the landlords, the banks with waivers, the employees what happened through JobKeeper end by the government and that will eventuate it.

So, now, coming out of COVID, Myer has a very strong balance sheet. It has over $200 million in net cash at a market capitalisation of $230 million currently that values the enterprise at only $30 million, and you relate that to their profit, the underlying profit over the last six months, that was over $40 million. So, in our mind, Myer looks very cheap at current levels, especially now given that our concerns around the balance sheet are largely alleviated. So, that's done. And now, it's really time for the market and for investors online to look at the underlying operations, the performance of them and that has been improving over the last few years with the new management team in place.

Hall: OK. I should point out that you've got a 5-Star rating on at the moment. It's down around to 29 cents as I said, but your fair value is about 60.

Faul: It's 60 cents, that's correct,

Hall: OK.

Faul: And in our minds there's a lot of upside, like there's over 100 per cent upside between the share price, current levels and our fair value. It's very attractive.

Hall: OK. Myer has about 60 stores, mostly across the Eastern States and I read that the capital city locations account for about 30 per cent of its earnings. What are the chances of it breaking any leases? Is that a risk for the store?

Faul: Yeah, it's interesting. So, you mentioned the capital cities. I think why it's important to them and why right now they're trading weaker is twofold—workers still coming back into the cities. We're sitting here pretty in Sydney, but I think in Melbourne it's a bit of a different story there. The CBD area there is a bit less traffic than it is here in Sydney where people are coming to work more so. The second factor really impacting those city stores at the moment is the lack of international tourists. So, that's customers that are missing as well. So, those city stores are underperforming the regional stores for Myer. In the online, that's transitory. That's going to play out over the next year until the borders reopen and we return to work across Australia. But in our mind, it's not a structural underperformance that we see for the city stores.

One thing that you mentioned though is what's going to happen with stores and profitability or if online continues its trend which it has been then, in our minds, Myer will have to rationalize its footprint and then gradually shrink that. But we think that Myer will successfully do that over time as long as that's a gradual progression and we don't see the risk of them breaking any leases or walking away from stores that are not coming up for renewal, or the lease is not expiring.

Hall: OK. Well, we'll watch the future with much attention. Johannes, thanks very much for your insights today.

Faul: Thanks so much, Lex.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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