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3 Aug 2011 - 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.
|
|
|
Assets ($m) |
|
Liabilities &
Capital ($m) |
|
|
|
| Cash |
169
|
|
Creditors |
517
|
| Stock |
378
|
|
Borrowings |
421
|
| Property |
531
|
|
Provisions |
144
|
| Other |
96
|
|
Other |
95
|
| Tangible
Assets |
1,174
|
|
Liabilities |
1,177
|
| Goodwill, brands |
901
|
* |
Capital |
898
|
| Total |
2,075
|
|
Total |
2,075
|
|
| * as at 29
January 2011 |
That's quite a contrast to
David Jones which has far less debt and substantial
net tangible assets.
|
|
|
Assets ($m) |
|
Liabilities &
Capital ($m) |
|
|
|
| Cash |
17
|
|
Creditors |
222
|
| Stock |
264
|
|
Borrowings |
94
|
| Property |
784
|
|
Provisions |
41
|
| Other |
104
|
|
Other |
67
|
| Tangible
Assets |
1,169
|
|
Liabilities |
424
|
| Goodwill, brands |
35
|
* |
Capital |
780
|
| Total |
1,204
|
|
Total |
1,204
|
|
| * 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.
|
|
|
|
|
Myer (MYR) |
David Jones (DJS) |
|
|
| Discount rate
(pre-tax) |
12.7%
|
15.3%
|
| Growth rate |
3%
|
1%
|
| Operating gross
profit margin |
40%
|
n.a
|
|
| * 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.
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