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MYER Video




 

Stock Of the Day  - MYER  (Expensive)

There is a little disappointment with regards to the Myer Holdings Limited (MYR) results reported for 26 weeks to 24 January 2015. Specifically, the net profit after tax (NPAT) was down 23.1% to $62.2 million. Earnings before interest, tax, depreciation, amortisation (EBITDA) dipped 15.6% to $145.3 million. Further, earnings before interest and tax (EBIT) was down 20.8% to $100.2 million.


Cash Cost of Doing Business (Source – Company Reports)

Another sinking point has been the 6.2% rise in cash cost of doing business (CCODB) to $569.6 million. The underlying costs were reported to be up 2.4% along with $20 million investment in the business. The $20 million were primarily spent on revenue generating initiatives such as Myer’s brand re-launch, refurbishing of stores and opening of new stores, IT infrastructure, and so forth. The operating gross profit went up 0.9% to $714.9 million while the operating gross profit margin dipped 24 basis points to 40.54%. This was primarily owing to the increase in competition and impact of weaker Australian dollar. What we note is that the trading conditions were challenging in second quarter and there was improvement in late December. Operating cash-flow dropped 25.3% to $194 million as opposed to $259 million of 1H FY2014, owing to the above-mentioned investments and condensed earnings.

The Company declared an interim dividend (fully franked) of 7 cents per share which is to be paid on 7 May 2015. This seems to be resulting from the Company’s confidence on its balance sheet position and robust cash generation capability. However, MYR reported that its net debt rose by 13.7% to $261 million.

With regards to the sales trend, the Company announced a 1.5% increase in 1H FY2015 total sales to $1,763 million which is up 0.9% on a comparable store sales basis with cosmetics category being the outperformer. There has been a 2.5% increase in Q2 total sales to $1,072 million which is up 1.0% on a comparable store sales basis. The total sales surged 3.9% in January 2015. In fact, continued strong growth in online sales was another positive. However, the Company conveyed that the sales although have been better than prior corresponding period but below expectations which is of course not a good indication. The challenging trading environment, drag in womenswear, disruption from Macquarie and Miranda refurbishments and Pacific Fair centre refurbishment have been highlighted as the tailbacks.


Sales Growth and Mix (Source – Company Reports)

As per the Company’s FY2015 downgraded outlook, it anticipates a continuation of the operating gross profit margin pressure into the second half. Specifically, a decrease in second half operating gross profit margin of 15-30 basis points compared to 2H FY2014 has been stated. Further, total costs are expected to grow by about $15 million in the second half in comparison to 2H FY2014. MYR conveyed that it expects the one-off costs in 2H with regards to the strategic review to be about $7 million. The FY2015 NPAT is also projected to be between $75-80 million (excluding one-off costs) with 2H FY2015 NPAT to be between $13-18 million. In our view, the commentary on strategic review looked quite subjective without specific directionality.

In view of the fact that the guidance is falling short of estimates, it is unclear why the Company did not cut the guidance while announcing for few management changes sometime back. The Company stated its unawareness about sales drop at the time of announcing the changes. This brings MYR’s compliance with regards to the continuous disclosure law in question. The trading of two new stores, completion of four major refurbishments, opening of additional space in Emporium adjoining the Melbourne flagship store ahead of Christmas trading period were thought to bring some gains earlier.


Operating Gross Profit Margin (Source – Company Reports)

Success also prevailed with the launch of the Giftorium concept across all stores. Brand roll-out including White Suede, By Johnny and Alex Perry in Womenswear; M.J. Bale, Herringbone and Aquila in Menswear; and Calvin Klein Performance in Women’s Active, during the first half proved beneficial to some extent. New Australian and international brands since the start of the second half such as Maison Scotch, Skin and Threads, and Asilio in Womenswear; Jo Malone in Cosmetics; Scotch & Soda, and Pierre Balmain in Menswear; etc. also contributed towards another highlight. The Company however conveyed not proceeding with the proposed store at Greenhills in New South Wales. Even with these piecemeal success points, the overall result has been quite disappointing with the recent management changes coming in an ill-timed manner.



Given the foregoing, we still believe that the stock is EXPENSIVE at the current price of $1.375.