Myer’s material alterations

Halfway through this financial year, with sales and earnings up, Bernie Brookes had good reason to be pleased with Myer’s performance in a difficult retail environment. Then, in the second half, sales fell, costs blew out and earnings began tumbling.

The relatively modest decline in Myer’s top line (down 0.2 per cent) could be attributable to the initially phony election campaign that began in January. Fourth-quarter comparable store sales were down 1.6 per cent.

The slump in second half earnings, which were down 24.5 per cent (or 15.3 per cent if a revaluation of an option to buy the remaining 35 per cent of the Sass & Bide brand were excluded), was due more to a sharp spike in Myer’s cash costs of doing business. Brookes blamed this on increased labour and store occupancy costs, refurbishments and investments in the group’s omni-channel strategy and its exclusive brands. Growth in lower-margin concession sales didn’t help.

During his seven-year tenure as chief executive of the department store group, Brookes has had a very good record of cost control, dialling costs down in line with shifts in sales. He was able to achieve a 40 basis-point increase in his operating gross profit margin in the year to July.

But a 3.1 per cent increase in the group’s cost of doing business (3.7 per cent in the second half) and a 9.7 per cent in depreciation charges flowed through to a 5.1 per cent decrease in earnings, excluding the impact of the Sass & Bide option.

Like most retailers, Brookes would be relieved that the election is out of the way, that a ‘’normal’’ majority government is in place (in the lower house, at least) and that there has been an apparent early pick-up in consumer confidence.

He is already warning that the first of the current financial year will be materially lower than the same half of last year. Myer has three of its top 20 stores undergoing major refurbishments and is expecting increased operating costs, including one-off costs related to its omni-channel strategy.

He does, however, expect an improving trend in the second half and into 2014-15.

Brookes was also able to announce some positive news. Myer bought a 65 per cent interest in Sass & Bide in 2011 and has since grown sales 45 per cent and more than doubled earnings.

The brand had double-digit sales and profit growth in the latest financial year. Myer now plans to buy out the remaining 35 per cent equity for about $30 million, with the business’ founders, Heidi Middleton and Sarah-Jane Clarke, remaining involved and David Briskin remaining executive chairman.

The other glimmers of positivity within the result were online sales growth of more than 200 per cent and continued growth in Myer’s exclusive brands sales, which were up $40 million and now account for about 20 per cent of the group’s sales base. Brookes expects the group’s online business will double this financial year and that they will break even, which would be a milepost in the development of Myer’s omni-channel strategy.

He described the current financial year as one of ‘’transition’’. What the department store sector is transitioning towards, however, isn’t clear.

Apart from the weak consumer confidence of the past three years and the continued growth in online retailing (which the local bricks-and-mortar retailers responded to quite tardily), there is a continuing influx of major retail brands from offshore into this market to fragment the available spending and impose pressure on the domestic retailers to continually improve their offering.

In the long run, offshore experience suggests that the ‘’bricks and clicks’’ model now being pursued by all the major retailers will prevail and that they should end up as the dominant players online. However, the physical entry of brands like Zara and TopShop and others with differentiated models and offerings does complicate the outlook and creates pressure for continual innovation and investment in their own offers.

The success and growth of Myer’s exclusive brands is a key to Brookes’ response to the threat. They are higher-margin, they aren’t available to online competitors and can be used to drive Myer’s own online sales towards Brookes’ target of $300 million a year – roughly the level generated by the group’s flagship Bourke Street store.

He also needs to continue to find ways to leverage off the membership of Myer’s loyalty program which, remarkably, signed up its five millionth member during the year and represents a potentially very significant competitive advantage and a defensive strength.