The top line in the Myer interim result today reflects the torrid conditions that retailers, particularly those exposed to fashion, experienced in the lead-up and aftermath of the critical Christmas period.
The bottom line reflects the increasing traction that the changes to Myer’s business model appear to be gaining.
The 5.3 per cent increase in earnings, to $62.8 million, reported today was a creditable outcome in an environment where the recent spate of retail collapses reflects the tough and intensely competitive environment. It isn’t helping the department and fashion store chain that big brand overseas retailers keep pouring into the market.
The intensity of the competition and soft demand was reflected in Myer’s sales numbers. Total sales fell 0.6 per cent to $1.8 billion, although they were 0.3 per cent up in a comparable stores basis.
The second quarter saw sales falling 1.3 per cent, or 0.5 per cent on a comparable stores basis. It appears that the early and fierce discounting in the lead up to Christmas had a pronounced, and negative, effect on the traditional Boxing Day sales numbers.
With Richard Umbers stepping up his plan to shrink selling space by closing stores and reducing store sizes, some impact on the top line could be expected. Myer’s experience, however, appears to conform to the sector’s experience.
Rival department store group, David Jones, whose first half-year ended on December 25, recently reported meagre 1.9 per cent earnings growth on sales that were down 0.5 per cent. It will be interesting to see what impact its post-Christmas sales experience had on its second-half numbers when it reports for the full year.
Beneath the headline numbers, Myer’s performance reflected the changes to its business model that Umbers introduced when the group embarked on its new five-year, customer-led and more localised strategy 18 months ago.
A key part of the strategy to sell what customers want to buy has been a shift away from the former emphasis on exclusive brands towards concessions. While that means sacrificing gross profit margin, it also lowers Myer’s own costs and increases its sales productivity.
The latest result conforms to what one would expect from the changes Umbers has made. The gross profit margin was down by 41 basis points to 38.3 per cent but the cost of doing business, as a proportion of sales, improved 77 basis points to 30.2 per cent. That latter ratio reflects a combination of the increasing proportion of concessions within the Myer mix and more conventional cost-reduction programs by Myer itself.
Encouraging for Myer, despite the sluggish second-quarter sales performance, inventories ended $5 million below the previous corresponding period’s, it improved its operating cash flows by $6 million, to $218 million, and it has net cash of $8 million in its balance sheet.
While sales in January and February were below its expectations, particularly in January, the group still expects its earnings before interest, tax, depreciation and amortisation (EBITDA) to grow faster than sales for the full year and net profit (before and after restructuring costs) to be greater than last financial year’s. In the half just ended EBITDA grew 2.7 per cent and the EBITDA margin widened 25 basis points to 8 per cent. It’s the first increase in that margin in five years.
There is still some finetuning for Umbers to do. Within the overall sales, concession sales were up 24.7 per cent but Myer exclusive brands sales, which carry higher gross margins, were down 11.6 per cent and national brand sales were down 4.1 per cent. That, and the impact of a weaker Australian dollar on products sourced overseas, explains the extent of the decline in gross margin.
Myer says the rate of decline in the margin is slowing and is focusing on improving its sourcing and distribution costs, reducing markdowns and on sales productivity. It’s also focused on further reducing costs and exiting unproductive space.
Umbers would be encouraged by the growth in the group’s omni-channel platform, where sales grew 48 per cent and profit is still growing faster than sales, and by the customer reception of its Warringah store in NSW, which is the first of its stores to incorporate the full range of “new Myer’’ in-store experiences. Myer says sales per square metre increased 38 per cent relative to the last year, 2013-14, when the store traded without disruption.
The strategy the group is pursuing is a five-year strategy, with some of the initiatives Umbers and his team have been pursuing yet to surface. Myer is about to introduce a new workforce management system, freeing up its back office staff, its developing a new merchandise planning system and the store rationalisation program is accelerating.
Thus the strategy remains a work in progress, less than halfway through its schedule. That the trends in Myer’s numbers do reflect the changes envisaged when it embarked on the strategy is reassuring. It says that in a difficult external environment the business is changing in line with the strategy and that the executive team is executing well.
They can’t do much about consumer spending, or the invasion of the foreign retailers, but they do appear to be in control of the things that they can control and the latest result does tend to suggest that the team can deliver earnings growth, even if the top line is under pressure.