King takes Myer past ‘go’

JOHN King has passed his first and most important test.

He’s not only produced a credible first-time result (as CEO) for Australia’s premier department store group, he’s also projected a credible business dynamic going forward.

Unfortunately, he, Myer and retail face two huge headwinds. The first is cyclical. The one thing keeping the economy – and retail, and department stores – above water through the December half was consumer spending. Can that be sustained into 2019?

It all comes down to jobs, jobs and, hopefully, more jobs. With very sluggish wages growth, consumer spending is totally dependent on more people in jobs.

What makes the outlook particularly challenging for Myer – and its arch-rival David Jones, literally next door in many places – is that it’s now trading in the traditional weak half.

That’s weak for sales and especially weak for margins. In a good year, you’d be happy to break even in this half; in a spectacularly good year you’d look to make a relatively low-margin profit. There’s a very real risk we are going to fall well short of even just a ‘good year’. That would condemn even the ‘old Myer’, of department store dominance when bricks-and-mortar retail still reigned supreme, to a poor result. It could prove devastating for the contemporary ‘challenged’ Myer.

The very reality of Myer producing a reasonable result could actually be counterproductive, if it reduces pressure on King to play hardball with both floorspace and landlords.

I remain convinced that the only way for Myer to build a semi-sustainable future into the semi-future – that’s to say, somewhere in the five-to-10-years range – is to merge with DJs and, as a very broad brush statement, promptly close half their combined number of stores.

They would also need to make a massive and fundamentally creative parallel investment in a very different online offer and delivery – broadly, a mix of an instore experience and the low-cost product pervasiveness of an Amazon.

In this context, King’s ‘success’ – further, so far only initial and modest – with an essentially conventional bricks-and-mortar restructuring and repositioning, could be exactly counterproductive.

Yes, that delivered some top-line positivity. But the relentless negativity of the 21st century on the 20th century Myer model was clear and undeniable.

Total sales – to stress, in the good half in a still buoyant broader economy – were still down nearly 3 per cent; and even, good and bad, down 1.4 per cent in the all-important NovemberChristmas-January period, where you’ve got to make the sales and even more the profit.

Yes, Myer still ‘made profit’. But while 3.8c EBIT in the sales dollar would be an encouraging number for a full year comprised of both good and bad halves, earning that just in the good half ain’t great.

King got himself and Myer over the first hurdle. But the hurdles will just keep coming. They will also get increasingly higher.