While most Australians have a soft spot for the Myer brand, the department store chain is clearly not the dominant retail force that it once was.
Back in 1982, department stores like Myer accounted for around 14.4% of all retail sales; now the figure is just 7.5%.
Since it was re-listed on the ASX in November 2009, Myer Holdings (MYR) has been a serial underperformer with sales either flat or down in nearly every quarterly update.
Although one or two stockbrokers now see some light at the end of the tunnel – i.e. margins are up, costs are down and expansion plans are afoot – our concerns about the company have intensified rather than eased.
A bit of history
Right from its earliest days, the Myer group has been a relentless amalgamator of businesses. When Sidney Myer decided to expand from Bendigo to Melbourne by purchasing a drapery store in Bourke Street in 1911, he didn’t wait long before acquiring adjoining properties and developing what became known as the Myer Emporium.
The group subsequently bought the Marshall’s department store chain in Adelaide, Farmers & Co and Grace Brothers in New South Wales, Barry & Roberts in Queensland and Boans in Western Australia.
For shoppers at the time, the attraction of department stores was obvious: you could see and buy a range of quality household goods all under the one roof.
But in the 1960s with Australia’s population growing rapidly, Westfield Group (WDC), Gandel Group and many others started building suburban and regional shopping centres that provided a similar array of product choices but on a larger scale.
They also had several strategic advantages: they generally offered more car-parking, more types of entertainment and were closer to where people lived. In short, they ‘out-emporiumed’ the Myer Emporium.
The next big thing
Keeping up with retail trends is a never-ending challenge and was highlighted by Westfield chairman Frank Lowy in his latest address to shareholders.
Undoubtedly the biggest threat facing all retailers at the moment is how to deal with the internet – the newest, most competitive emporium the world has ever seen. If you’re not convinced that online sales are revolutionising the retail sector, just ask any delivery driver or airport worker about the growth of overseas deliveries and cargo.
The truth is that more you reflect on the historical timeline and the landscape ahead, the department store model looks like a dinosaur.
Of course, Myer and its key rival David Jones (DJS) are trying to staunch the tide with a range of plausible (and similar) business initiatives. Both are determined to drive greater cost efficiencies, improve inventory management, rollout new stores, form strategic alliances, focus on direct sourcing, promote home brands and beef up their online presence.
But Myer looks more vulnerable than David Jones on a number of fronts. For instance,
- It has much more debt than DJS, both on a gross basis and net of cash.
- It has an ambitious store rollout plan which will lift total stores from 67 to 80 over the next three years. DJS only intends to add 5 new stores taking its total to 41 by 2014.
- MYR has lower sales productivity (measured by average sales per square metre).
- It has a much lower return on equity than DJS (22.7% vs 17.4%).
- MYR has a huge amount of goodwill on its balance sheet versus DJS.
The last point is particularly worth noting. One of the things that stands out when you examine Myer’s balance sheet is that the company has no net tangible assets – i.e. its tangible assets are almost exactly equal to its liabilities.
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MYER’S BALANCE SHEET
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Assets ($m)
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Liabilities & Capital ($m)
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| Cash |
169
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Creditors |
517
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| Stock |
378
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Borrowings |
421
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| Property |
531
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Provisions |
144
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| Other |
96
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Other |
95
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| Tangible Assets |
1,174
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Liabilities |
1,177
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| Goodwill, brands |
901
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* | Capital |
898
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| Total |
2,075
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Total |
2,075
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| * as at 29 January 2011 | ||||
That’s quite a contrast to David Jones which has far less debt and substantial net tangible assets.
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DAVID JONES’ BALANCE SHEET
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Assets ($m)
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Liabilities & Capital ($m)
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| Cash |
17
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Creditors |
222
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| Stock |
264
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Borrowings |
94
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| Property |
784
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Provisions |
41
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| Other |
104
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Other |
67
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| Tangible Assets |
1,169
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Liabilities |
424
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| Goodwill, brands |
35
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* | Capital |
780
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| Total |
1,204
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Total |
1,204
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| * as at 29 January 2011 | ||||
Is this a big deal? The answer depends on how and why you are valuing the two businesses. Listed stocks are generally valued on a going concern basis, not break-up value, so asset backing is not something that most analysts tend to focus much on nowadays.
But the valuation of intangibles shouldn’t be ignored. Myer states in its accounts that the value of goodwill is tested annually for impairment using cash flow analysis and financial budgets approved by management. This is in line with accounting standard AASB 136.
However the comparison with David Jones is both illuminating and disturbing. Even acknowledging that there are differences in strategy and structure, both companies are department store chains that are more similar than dissimilar. Yet David Jones values its goodwill at just $35 million, $866 million less than Myer.
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GOODWILL IMPAIRMENT TEST ASSUMPTIONS
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| Assumption |
MYR
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DJS
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| Discount rate (pre-tax) |
12.7%
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15.3%
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| Growth rate |
3%
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1%
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| Operating gross profit margin |
40%
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n.a
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| * as at 29 January 2011 | ||
Given the historical trends mentioned earlier, is it really credible that the Myer’s goodwill and brands are worth twenty times more than David Jones? Would anyone pay $901 million for these intangible assets if they were put on the market?
Around $349 million of Myer’s goodwill is from past acquisitions and $391 million is attributable to brand names and trademarks. Those values have remained almost stable for the past three years despite the group sales falling consistently over that period. Electronics retailer JB Hi Fi (JBH) had sales of $1,683m in the first-half of FY11, a mere $50m less than Myer achieved, yet its goodwill and brands are valued at just
$83 million.
No matter how confident you are in Myer’s business plans, it’s not hard to imagine a scenario involving a hefty write-down of these intangibles and in our view investors need to tread warily.
Warning: While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), we do not accept responsibility for any loss suffered by any person arising from reliance on this information. This document is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.