Company overview - Myer Holdings Limited (Myer) is an Australia-based department store company. The Company's department store network includes a footprint of approximately 60 stores in retail locations across Australia. The Myer merchandise offer includes 11 product categories: Womenswear; Menswear; Miss Shop (Youth); Childrenswear; Intimate apparel; Beauty, fragrance and cosmetics; Homewares; Electrical goods; Toys; Footwear, handbags and accessories, and General merchandise. The Company also owns womenswear designer brand, sass & bide. The Company's brands include TOPSHOP TOPMAN, Seed, French Connection, Mimco, Veronika Maine, Jack & Jones and Industrie. The Company's subsidiaries include Myer Pty Ltd, NB Elizabeth Pty Ltd, NB Russell Pty Ltd, Warehouse Solutions Pty Ltd, Myer Group Finance Limited, Myer Group Pty Ltd and Myer Travel Pty Ltd. The Company also undertakes activities outside the department store retail business through its subsidiaries, sass & bide, and FSS Retail Pty Ltd.

 

MYR Details
 
Restructuring of TOPSHOP’s Australian operations in line with evolving competition:Myer Holdings Limited (ASX: MYR) recently announced that Austradia Pty Limited (in which Myer holds a 20% interest), the Australian franchisee of TOPSHOP TOPMAN has appointed administrators Ferrier Hodgson as the fashion retailer’s sales have been continuously falling while losses were up. Ferrier Hodgson will work with Myer and the UK-based franchisor Arcadia Group on restructuring activities to deliver the finest outcomes for customers and other stakeholders. MYR had acquired a stake in Austradia in September 2015 under its “wanted brands” strategy. The group had stated that the trading of 17 TOPSHOP and 17 TOPMAN concessions in Myer stores would continue as normal, despite the latest development. A key aspect to note is that the current restructuring seems to be evolving from the entry of Amazon and TK Maxx into the Australian market and the mounting losses owing to intense competition. Recently, global e-commerce giant Amazon announced that it will open online shop front service in Australia, and this is increasing the pressure on the domestic retail sector to catch up with the digital economy. Concerns grew even more in recent months when Amazon registered hundreds of trademarks in the country and announced for additional investments.
 
Strong online sales while overall Q3FY17 result was impacted by tough market conditions: For Q3FY17, Myer reported a 3.3% year on year (yoy) decline in sales to $653.0 million, while it was down 2.0% on a comparable store basis. The group’s total year to date (YTD) sales fell 1.3% to $2,438 million. Moreover, sass & bide’s subdued performance continued during the quarter led by $1.5 million of Myer’s shortfall in Q3FY17. However, the group’s sales per square meter on a rolling 12 months’ basis was up 5.1% compared to July 2015 and MYR witnessed a robust growth of 36% yoy in online sales driven by substantial investments in improving omni channel offer. Further, as part of productivity improvement across all assets, the company decided to hand back approximately 50% of the space at the Richlands Distribution Centre in Queensland. Despite fall in sales during Q2FY17, the company expects EBITDA growth to exceed sales growth in FY2017 with increased NPAT over FY2016, at the back of focus on driving productivity, efficiency and reducing historic dependency on discounting (provided there is no return to conditions that existed around the January Stocktake period). 

Improving Operating Margins (Source: Company Reports)
 
Focusing on store footprint optimization:For H1FY17, the group’s total sales fell 0.6% yoy to $1,784.6 million while increased by 0.3% yoy on a comparable store basis. The result was impacted by 1.3% yoy decline in Q2FY17 sales (sales in January and February were not as forecasted). The group’s operating gross profit margin fell 41 basis points to 38.3%, led by the continued mix shift to concessions and the half-on-half deterioration in the Australian dollar. However, the impact was largely mitigated by continued focus on optimizing concessions, improved sourcing and select price increases. While EBITDA grew by 2.7% yoy to $142.2 million, EBITDA margin increased by 25 basis points to 7.97% for the first time in past five years. Importantly, a further step change in costs saw CODB (Cost of Doing Business) reduction by 77 basis points to 30.2% led by savings in store salaries due to the introduction of more flexible staffing arrangements following voluntary redundancies in FY2016. Further, the shift in mix driven by the strong customer response to concession brands and weaker performance in Myer Exclusive Brands (MEBs) continued during the period as concession brands grew by $76.5 million to $386.2 million while sales in MEBs were down by $39.4 million to $300.2 million. However, NPAT grew by 5.3% yoy to $62.8 million, led by the company’s omni-channel business as it continued to grow by 48% yoy with a much-improved online customer experience coupled with significant improvements in pick, pack and fulfilment contribution.In turn, cash flows from operating activities improved by $6 million to $218 million during the same period with cash conversion of 153%, while net debt at the end of the period was reduced by $15 million resulting in a net cash position of $8.0 million.
 

H1FY17 Financial Summary (Source: Company Reports)
 
Omni channel is growing from strength to strength: Omni channel division reported a 48% yoy growth in sales with home segment as a top performing category with 66% yoy growth. Further, online segment represents more than 10% of home business as user experience improvements have driven conversion growth by 23% and basket size by 6%. The company has also partnered with retail payment platform, Afterpay, to enable consumers buy items and then pay for them in instalments. Profitability from Omni channel continues to increase as click and collect represents 11.8% sales, driven by 7% decline in cost per order with 18% reduction in fulfilment duration.
 

CODB Bridge (Source: Company Reports)
 
Enhanced merchandise range tailored to local customers:The company incurred a capital expenditure of $59 million, which is an increase from $28 million of expenses in H12016, due to continued investment in ‘wanted brands’ and the major redevelopment of the Warringah store and creation of ‘Wonderland by Myer’ at the Sydney City store. The company witnessed a positive response to the launch of new store at Warringah Mall as sales per square meter grew by 38% compared to FY2014, when the store traded without center interruption, and is further expected to benefit as customer traffic continues to increase. During the same period, the merchandise range was enhanced with the introduction of approximately 700 new or upgraded installations; and further, MEB master brands with improved service model are being rolled out to 33 stores. The focus on store footprint optimization continued with the closure of three stores at Wollongong, Brookside and Orange. In addition, further progress in optimizing support office has been made by the decision to hand back more than a third of the space at 800 Collins Street. Modest cash flows and healthy balance sheet is expected to support further capex investment and increase in interim dividends.
 

New Myer Target Metrics (Source: Company Reports)
 
Partnering with global brands:The company is partnering with unique and innovative brands to give customer access to contemporary products and services. As part of its market strategy, MYR already entered into a partnership with Google and Facebook, and early this year partnered with Twitter to be the first Aussie brand to broadcast live through Periscope 360 at a fashion launch. The group also trialed partnership with UberEATS for last minute gift delivery. Further, the retailer has collaborated with progressive brands including Virgin Australia and Red Balloon. Notably, Myer has also become the first department store to sell cars via Tesla collaboration. Further, the company had, some time back, established a Christmas Giftorium with 17 different personalization options. Importantly, gifting options already increased by 38% on last year.
 
Potential as a takeover target and interests of substantial holders:It is noteworthy that Premier Investments Ltd (PMV) made a strategic investment of 10.7% in MYR in March 2017. However, the group was reluctant to make any takeover offer for Myer then. In fact, many stakeholders have recently increased their stake in the group. For instance, Investors Mutual Ltd enhanced their share in Myer to 9.85% from 8.67%. Given the price scenario, new management’s efforts on meeting guidance for NPAT and EBITDA growth, and strength of portfolio, many players (such as PMV) and other private equity firms seem to be eying the stock for a takeover and might hammer on it at the right time.
 
Recommendation: The stock has fallen 34.12% over the past six months as on May 29, 2017, in line with peers in the anticipation of increased competition with Amazon’s entry in Australia. The overall industry sentiment also further deteriorated with recently reported weak retail sales data in Australia and no positive announcements in the latest federal budget to boost the retail consumer spending. However, MYR now seems to be little judicious in terms of its discounting approach while the group continues to enhance efficiency with >55% of stores now operating the workforce management system coupled with space hand-backs at the Richlands DC. Myer also seems to find support from the New Myer strategy for future sales, EBITDA and cash flow, despite an increasingly challenged environment. Other aspects to note include concession mix and initiatives that leverage technology to help on savings and bleak financial performance over many years providing a runway for the new management to demonstrate potential going forward. Despite the share price underperformance (with negative developments already incorporated), there are key catalysts that are expected to drive growth. Given the above, we put a “Buy” on the stock at the current price of $ 0.845
 

MYR Daily Chart (Source: Thomson Reuters) 

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