DEPARTMENT STORE ON CUSP ON A FEW FRONTS
WHAT is still Australia’s biggest brick and mortar department store group Myer is poised on a whole series of cusps.
As of right now the one cusp it is not poised on is that between immediate survival and oblivion. New CEO John King will get, at least, into the new year, to try his – yet another – shortterm operational retail strategy.
He will also get to play it out under the existing board of directors and the chairman Garry Hounsell who hired him.
If the major institutional shareholders wouldn’t support Solomon Lew in ousting Hounsell and the board when the Myer crisis was running red hot, running into and through the half-year results and the sacking of former CEO Richard Umbers, they won’t be supporting Lew off the back of these results.
Lew could demand as he did yesterday that “Mr Hounsell must step down immediately or risk having his Board spilled by a strong shareholder revolt at the upcoming AGM,” but he was whistling into an insto wind. Or, a combination of insto paralysis and hope.
The new deal with its banks is a critical – perhaps the – critical – element in buying Hounsell and King time.
Obviously – short of some complete retail meltdown, of which there were no hints of in the detail of the trading numbers, or a complete operational stuffup – it removes the risk of the banks pulling the plug over the next year.
But even more critically it gives Myer negotiating power with its shopping centre landlords.
One way or another Myer has to cut its retail floorspace and cut it significantly – either by closing stores or, the King preference, closing floors.
No shopping centre wants to see the first. But equally if they played hardball with Myer over rentals, they now know the banks will rank ahead of them for payment of debts whereas before they ranked equally.
This gives Myer a serious chance of getting its running costs down, while at the same time – if it does it right – extracting higher margins out of lower sales.
That brings us back to the cusps. The basic one Myer is pivoting on is the continued fall, from half-tohalf, of in-store sales; falls that are relentless through the ‘good’ first half running through Christmas-New Year and the ‘bad’ half into winter.
In the first half sales were down 3.6 per cent; in the second a slightly improved 2.6 per cent. But the second half in store sales drop was more than 4 per cent as online sales continued to rise strongly.
Further, those first-half sales produced a gross operating profit of
$108 million; the second half just $41 million. And the actual bottom line ‘profit’ after tax actually went $8 million into the red in the second half against a small $5 million profit in the 2017 second half.
What made that latest bottom line loss somewhat more disturbing was that it occurred in the six months (through June) in which the overall economy recorded its strongest growth in the last seven or so years.
That’s the second big cusp Myer is now pivoting on: the overall economy is unlikely to sustain that strong growth.
Even more pointedly, consumers are unlikely to be able to maintain their strong spending, not with mortgage interest rates rising, wages growth remaining sluggish and consumers already spending close to 100c of each dollar of income.
The third big cusp that Myer – and every, and I do mean every, body else – continues to pivot on, is of course the digital challenge.
Myer is growing online sales apace, but not only don’t they offset the continual dollar fall from instore sales – so total group sales continue to slide – but they undermine both the overall operational metrics and specifically margins.
Within all this, King and his team have to get the ‘basic retailing’ as right as they can, and they can’t take their time ‘getting it’.
These are mundane but critical things like overall market projection – King wants to abandon clearance and go back to solid ‘middle market’; and the actual stock selected or, more accurately, punted.
Once again the next few months – the peak trading (and, traditionally, profitmaking) season – are going to be both critical and pivotal. The next interim profit in March will be telling and maybe decisive.