The company recently announced the successful refinancing of its syndication facility totalling $600 million. Key features of the new facility include more favourable pricing, increased tenor and improved terms. According to the management the successful outcome of the refinancing decision delivers a lot of benefits to Myer and presents an opportunity to secure more favourable pricing on improved terms over an extended period. In addition to a lower interest margin, the fixed charges coverage ratio covenant has been lowered from 1.65 times to 1.50 times across all facilities.
Financial Highlights (source - Company Reports)
Myer Holdings Ltd has spent the majority of the last two years stuck in the red. In March company announced its results for 26 weeks up to 24 January 2015 whose key highlights were, an increase in total sales by 1.5% and a 0.9% increase on a comparable store basis, decrease in gross profit margin by 24 basis points, decrease in EBITDA b y 15.6%, decrease in EBIT by 20.8% and decrease in NPAT by 23.1%. The company expects the gross profit margin pressure to remain during the second half. The company anticipates that the total cost will grow by approximately $15 million in the second half. The Company now expects FY2015 NPAT to be between $75-80 million. Operating cash flow of the company fell to $194 million a decrease of 25.3%, as a result of reduced earnings and investments to support refurbishments and merchandised initiatives. Aged inventory fell 4.3% during the period, while overall inventory increased by 6.9 per cent to $375 million, driven by additional merchandise for new and refurbished stores. Stock turn were flat at 3.5 times.
Financial Highlights Continued (Source - Company Reports)
The highly competitive environment and the weak Australian dollar were cited as two reasons for deterioration of gross margins. Trading conditions during the second quarter were challenging. A review of Myer’s strategy continued during the half and was accelerated towards the end of the period. This work is ongoing with a view to positioning the business for a sustainable and profitable future. Cosmetics continue to be the best performing category during the half benefiting from growth across number of brands and an ongoing commitment to high quality services and theatre in stores. Other strong performing categories included Menswear, Childrenswear, Toys, and Entertainment. Offsetting this was the continued challenges in the Womens wear category. Online sales continued to grow driven by improvements in the presentation, functionality and stability of the website, ongoing improvements to fulfilment processes, and increased customer engagement.
Myer previously flagged that it would make investments in the range of $35-50 million during FY2015. As sales tracked below expectations, a prudent approach to this investment was taken. Approximately $20 million was spent during the first half, primarily on revenue generating initiatives including Myer’s brand re launch, refurbished and new stores, IT infrastructure, and costs relating to the merchandise and Omni channel strategies.
While ahead of last year, sales in February were below expectations and this trend has continued into March. The February operating gross profit margin result and early read on March sales has led to the Company revising expectations for the year. During the second half, two new stores will support sales and four completed refurbishments, as well as continued growth in online sales. However, the heightened competitive environment experienced in the first seven weeks in the half is expected to continue. A number of new sales driving initiatives will be rolled out across stores and online, particularly in the fourth quarter. Overall costs will be carefully managed with a focus on investment in customer facing and revenue generating initiatives.
MYER Daily Chart (Source - Thomson Reuters)
Myer has been undertaking a thorough review of its strategy. This has continued under the leadership of new Chief Executive Officer, Richard Umbers. At a macro level, the challenges are well known, particularly the globalisation of retail, which has brought new competitors to our shores. Digitisation has both empowered the consumer and created new channels to market. Customers have changed the way they shop and their expectations of retailers have changed significantly. Myer shareholders are eagerly awaiting an update from the company’s new chief executive, Richard Umbers, regarding Myer’s strategy going forward which could result in a very positive, or very negative, reaction from the market.
The company is currently trading at a stock price of $1.255, which is away from the 52 week high of 2.520 and close to the 52-week low of 1.185. At the current price the company is trading at a Price to Earnings multiple of 9.150 and a dividend yield of 10.04%. There are other companies in the sector are trading at a higher P/E ratio and lower dividend yield.
GIven the headwinds facing Australian department stores, we believe that the stock is expensive at the current price of $1.25.
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