EUR 850.00 For Business Accounts Only

Morningstar | For Myer, the Proof Will be in the Christmas Pudding. FVE Unchanged at AUD 0.63.

We maintain our AUD 0.63 fair value estimate on no-moat-rated Myer, after management provided a quarterly trading update contrary to its original intentions not to. Allegations in the financial press, aimed at Myer’s financial performance, triggered the response from management. Our investment thesis stands: Myer’s sales remain flat long term, as the chain continues to lose market share to online players and specialty fashion stores. The department store sector, including Myer, gradually reduces floor space as footfall declines with Australian consumers increasingly shop online. We anticipate Myer will adapt by shrinking its floorspace by 30% over the next decade. However, an increased weighting of its offering towards differentiated, higher-margin private label products, as well as greater sales productivity underpin a recovery in EBIT margins and profits. Over the next 10 years, we forecast EBIT margins to widen to 3.3% from 1.8% in fiscal 2018.

The unaudited sales figures reported by the company differ from those quoted by the press. Myer reported a 4.8% decline in total sales in the first quarter of fiscal 2019, with like-for-like sales down 4.3%. This is worse than our prior fiscal 2019 full-year forecast of virtually flat sales. We lower our full fiscal year 2019 sales growth estimate to a decline of 2.6%, implying an average sales growth rate of 2.0% for the remainder of the fiscal year.

Although the sales update was disappointing, it didn’t come entirely out of left-field. The company had flagged that sales performance would be volatile throughout fiscal 2019, as management has its sights on the bottom line, which include moving away from unprofitable sales, as opposed to preserving sales just for their sake. This seems to be having the desired effect. Unaudited, adjusted net loss after tax improved on the loss in the first quarter of fiscal 2018, implying an increase in operating margins.

Myer has been operating at a loss during the first quarter for the past five years, and we expect the Christmas trading period to make or break Myer’s year, as has always been the case historically. We estimate operating margins to decline by 10 basis points to 1.7% in fiscal 2019, and forecast an underlying NPAT of AUD 28 million.