Myer bounces off a low base

The recent outbreak of optimism from Gerry Harvey, the performance of the Woolworths and Wesfarmers brands and the Myer first half results today are providing solid evidence that the worst of the financial crisis-inspired retail recession is past. The environment, however, remains weak, fragile and challenging.

Myer followed up its first quarter of comparable store sales growth last year with two more consecutive quarters of growth in the first half, which helped it increase earnings before interest, tax, depreciation and amortisation 1.4 per cent, although higher depreciation charges reduced net profit growth to 0.7 per cent.

Bernie Brookes agreed that the result, materially ahead of market expectations, tended to indicate that retail conditions have stabilised and become less volatile. They have, however, stabilised at a significantly lower level. The base for comparison of today’s $87.9 million interim profit is the same half of 2011-12, where the profit was nearly 20 per cent lower than the previous corresponding half.

Myer’s unwillingness to provide any guidance for the full year, while partly attributable to internal developments including the refurbishment of three of its top 20 stores, reflects the general concern among retailers that conditions, while improved, remain weak and fragile.

The lengthy lead-up to the next federal election adds to the uncertainty, although the rebound in the sharemarket and the apparent stabilisation of residential property markets ought to help lift consumer confidence and spending.

While battling recessed conditions the big retailers have also had to confront the structural challenges to their businesses generated by the strength of the Australian dollar and the growth in online retailing. Those issues are, of course, related.

Brookes’ response has been a shift to direct sourcing, growth in Myer’s exclusive brands and negotiations with suppliers for ‘’global price harmonisation’’ so that he can compete with online retailers.

While that showed up in price deflation (0.4 per cent in the latest half) it also reduced markdowns and helped enable Myer to improve its gross profit margin 23 basis points to 41.21 per cent. Another factor in its margin improvement has been its exit from the electronic and whitegoods sectors which have been most impacted by the growth in online retailing.

Like most of his peers, Brookes is also having tougher negotiations with his landlords when leases are up for renewal over rents and contributions to refurbishments and has been prepared to close underperforming stores. The structural changes in retailing are flowing through to retail property owners.

Myer’s expansion of its portfolio of exclusive brands, whose sales were up 10 per cent and which now account for 19.8 per cent of its entire sales base, has been a major factor in its ability to arrest its earnings downturn and improve its margin, while Brookes’ decision to invest heavily in customer service also appears to be paying off. He described the improved service as the biggest driver of the result.

The growth in exclusive brands not only provides better margins but has both defensive and offensive aspects. Myer can’t be under-cut on those brands by other online retailers and they provide unique inventory for its own fledgling online offering – which is growing, off a very small base, at an annualised rate of about 200 per cent. Brookes remains confident Myer will be generating about 10 per cent of its sales, or around $300 million a year, from its online presence within five years.

Gerry Harvey was very excited about a 4 per cent lift in Harvey Norman’s January sales earlier this month despite reporting a 36.5 per cent fall in interim earnings. The Myer numbers today, which ignited its share price, add to the sense that the sector has bottomed, albeit at relatively low levels and with only modest and heavily qualified expectations for the second half of the year.