Solomon Lew on the warpath

MyerBourkestreetRetail landlords, the Myer board of directors, analysts, retailers and even a few federal politicians are mulling over the wisdom of Solomon Lew this week.

The canny investor and prominent retailer, Lew unleashed broadsides against landlords, politicians and the Myer leadership as part and parcel of the 2017 financial year results announcement for Premier Retail.

Lew’s comments on Myer actually lifted the beleaguered department store chain’s share price, apparently on an expectation by investors that he might finally launch a takeover offer or, at least, join the board of directors and revive the fortunes of the iconic retailer.

Lew said this week a takeover bid was not currently under consideration, but he is expected to press for a shake-up of the Myer board at the annual meeting in November.

Releasing the FY17 financial results for Myer, CEO Richard Umbers told shareholders there would be an update on changes to the turnaround strategy he launched in 2015 at the November AGM.

Lew’s scathing criticism of Myer’s performance and the turnaround strategy has added pressure to Umbers’ management team and it seems certain to force changes to the retailer’s board.

Lew’s Premier Investments is the biggest individual shareholder in Myer with close to an 11 per cent stake and is smarting over a fall of around 35 per cent in the value of that shareholding, since the shares were acquired six months ago at $1.15 per share.

Those shares were languishing at 70c before Lew’s criticism and revelation that he has asked Myer for a copy of the share register, as he is considering writing to Myer shareholders ahead of the AGM.

Whether or not Lew wants a seat on the board is yet to be determined, but he certainly believes that the malaise at Myer can, in part, be attributed to a lack of direct retail experience in the retailer’s boardroom.

For that matter, Lew is also unconvinced that Umbers is the right man for the CEO with his experience in department store retailing limited to just six months as chief information officer, before replacing Bernie Brookes as CEO in March 2015.

Umbers has had retail experience but, like Brookes, it was in supermarkets with Aldi in the United Kingdom and Ireland, Progressive Enterprises in New Zealand and Woolworths in Australia.

Lew knows how tough the retail market has been in the past few years and blamed a number of events outside the control of Premier Retail management for a relatively lacklustre performance by his own  company’s portfolio of fashion brands.

However, Lew believes the problems at Myer run deep and are not just a consequence of poor consumer sentiment, unseasonal weather and household debts and increasing costs.

Lew’s comments will create increased scrutiny and questioning of Umbers’ turnaround plan, performance and targets by analysts and other shareholders, especially the institutional investors who reflect on the $1.8 billion in enterprise value burned since Myer floated on the ASX in November 2009.

Myer is now facing the very serious prospect of a shareholder revolt at its AGM, with the possibility that directors facing election, including current chairman, Paul McClintock, will be replaced by candidates supported by Lew and the board’s chosen choice as the next chairman, Garry Hounsell, may be rejected.

McClintock has indicated he will step down as chairman of Myer this year but is understood to be keen to remain on the board, shareholders permitting.

Landlords under fire

Lew did not spare politicians for their handling of the economy, which in turn, was weighing down consumer sentiment and restraining retail spending, but alongside Myer, landlords were on the receiving end for most criticism.

Lew described landlords as unrealistic and in “la la land”, pursuing a dangerous strategy in offering international retailers incentives and rental deals up to two thirds cheaper than for specialty retailers.

He said Premier Retail did want to close stores such as the Portmans and Just Jeans flagships in Bourke Street Mall in Melbourne, but there was little choice when rents were excessive.

Lew said landlords would lose much more money if popular Australian retailers were forced to quit locations where rents had become unrealistic than if they negotiated better deals with their existing tenants.

Emphasising that Lew is serious about his rebuke of landlords over rent increases and better rent deals for global retailers entering the market, Premier Retail has closed 86 unprofitable stores over the past five years, including eight in FY17.

Premier Retail CEO, Mark McInnes said that as consumers continue to shift their spending from physical stores to online, Premier Retail will continue to focus on store profitability to drive appropriate investment and shareholder returns.

“Where landlords do not continue to invest in overall shopping experiences and/or adjust their rent expectations in line with the performance of their own centres and the major shift in consumer behaviour, further store closures may be necessary,” McInnes said.

The Premier Retail chain most likely to shed stores appears to be Dotti, which operates in the young fast fashion category and has faced more local and international competitors over the past 12 months. McInnes claims Dotti has received large capital incentives and terms that reflect far lower rents and occupancy costs than incumbent retailers.

“Landlords will be required to significantly adjust the rent and capital incentives to retain Dotti in the young fashion category. Without this adjustment, many Dotti stores may need to close and continue to build on its strong online sales platform,” he said.

A decrease in sales

The Lew broadsides at the Premier Retail results announcement deflected some attention from a decline in revenues for the fashion brands and a deft bit of making things look a little better by deleting the trading results from a 53rd week in FY16.

Premier Retail declared a 5.7 per cent increase in total sales for FY17 to $1.09 billion, although like-for-like sales only increased 1.1 per cent.

The pre-tax profit for FY17 was $131 million, up 7.6 per cent on the $122 million for a notional 52-week year in FY16, but in real terms up minimally on the $129 million that was reported for the 53 week full financial year in 2016.

Lew claimed redevelopment works at Chadstone Shopping Centre, the November 2016 earthquake in New Zealand, the building collapse at the Hobart Cat & Fiddle Centre, unseasonably cold weather in Australia last October and low consumer sentiment had all had an adverse impact on sales and earnings in FY17.

Portmans, Jacqui E, Dotti and Jay Jays all suffered a decline in sales, while Just Jeans was steady, leaving Premier Retail to rely on the expanding Smiggle stationery chain, Peter Alexander and online sales platforms for revenue and profit growth.

Smiggle increased sales by 29 per cent to $238.9 million, expanding its store network by 58 to 297 outlets across Australia, New Zealand, Singapore, England, Scotland, Wales, Northern Ireland, Malaysia, Hong Kong and the Republic of Ireland.

More than 60 per cent of Smiggle’s sales are now generated overseas and the brand plans to enter continental Europe within the next 12 months. It is now expecting to add up to 120 new stores in existing markets during the next two years.

McInnes said the sales target for Smiggle for FY20 is $400 million, while Peter Alexander is aiming for sales of more than $250 million in the next three years.

Boosted by six new stores and five concession outlets in Myer stores, Peter Alexander achieved sales growth for the year of 14.0 per cent to $190.9 million, while Premier Retail’s online sales increased 44 per cent to $68.1million.

McInnes expects to exceed the company’s target of $100 million annual sales sooner than the 2020 timeframe set back in 2011 as part of a Premier Retail review of the business that identified diversification as the key for future growth.

 

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