Promising signs of change at Myer, though long-term risks remain

Myer’s move to reduce discounting and cut operating costs, while focusing on online sales and exclusive brands, had a positive impact on earnings in the first half of FY19, driving a 3.1 per cent increase in NPAT and 99bps improvement in gross margin. But some remain sceptical that these changes will be enough to drive long-term growth.

“Despite a better-than-expected result [in the half], the long-term outlook for Myer remains challenging,” Bryan Raymond, Citi analyst for retail and gaming, said in a report released to investors on Wednesday evening.

Further cuts to the cost of doing business – which Myer achieved primarily through ‘rostering efficiencies’, essentially fewer staff hours, in the first half – could negatively impact like-for-like sales going forward, Raymond said.

The reduction in discounting could also hamper like-for-like sales growth, especially as the timing of state and federal elections this year is expected to dampen consumer sentiment.

In a call to investors on Wednesday, Myer CEO John King said the retailer had removed four weeks of discounting from its calendar during the first half and plans to do the same in the second half, which he acknowledged would result in a “lumpy” topline for the year. But he said this was necessary to return the business to profitable growth.

While the reduction in discounting has led to an improvement of 99bps in Myer’s gross profit margin for the half, Raymond warned the uptick could ease, if Myer’s rival David Jones starts discounting to clear excess stock. Worryingly, Raymond noted that David Jones’ inventory per sqm has increased 26 per cent over the past two years.

At the same time, however, many of the ‘Customer First’ changes King outlined on Wednesday were implemented just five months ago, and their full impact won’t be measured or felt for some time.

For instance, King said the company is in the process of moving online order fulfilment from back-of-house in department stores to a centralised distribution centre, which he said would allow the retailer to increase the range of items it sells online, improve order fulfilment speed and increase its selling area in stores. This project is not expected to be completed until next year.

Another significant change that is still in progress is the reduction of physical floor space across the network. This will see Myer hand back entire floors in some stores to landlords, and shrink certain categories and expand others. King on Wednesday said the shape of the business will change as it reduces its physical selling area and rapidly expands a central online business.

King expects to have more information about which stores will be downsized or rationalised in September.


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