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UPDATE 2-Myer profit dips as Australian retailers struggle
September 13, 2012 / 12:36 AM / 5 years ago

UPDATE 2-Myer profit dips as Australian retailers struggle

* H2 net down 3.3 pct to A$52 mln, ahead of forecasts

* Final dividend 9 cents/share

* Says conditions remain tough, gives no guidance

* Shares fall as much as 4 pct to 6-week low, then recover (Adds analyst comment, updates shares)

By Miranda Maxwell

MELBOURNE, Sept 13 (Reuters) - A strong Australian dollar is luring shoppers to chase online bargains, allowing overseas retailers to squeeze profits at the country’s leading department store chains.

The latest to feel the pinch is Myer Holdings Ltd, which on Thursday reported a 3.3 percent drop in second-half net profit. That wasn’t quite as weak as analysts had predicted, and the company, founded by a Russian immigrant in 1900, said improving profit margins would offset upward pressure on costs.

But Myer gave no sales or profit guidance, saying the outlook was uncertain in a tough retailing environment. Consumer confidence has been sapped by relatively high interest rates and falling home and share values. Many shoppers are spending less and saving more.

Department store sales slumped more than 10 percent in July, the biggest fall in seven years, and latest data show that one in 10 bankruptcies is in the retail trade.

“I wouldn’t touch any retailers with a 10-foot pole at the moment,” said Cameron Peacock, analyst at IG Markets.

“Australia’s retail sector is struggling. More and more people are moving to online brands. Having a physical shop and fixtures and employees - it’s just too hard to cover the overheads related to that.”

Shares in Myer, which operates 66 stores, fell more than 4 percent to their lowest in more than 6 weeks. The stock, valued at around US$1 billion, last traded down 0.4 percent at A$1.84.

Australia’s economy, helped by a once-in-a-century mining boom, has withstood the global slowdown better than most, but its strong currency is encouraging shoppers wielding tablets and smartphones to hunt down bargains overseas. Australian retailers are having to offer discounts to keep up.

Myer, which recently redeveloped its flagship Melbourne store, is also under pressure from global rivals such as Zara , Topshop and Gap Inc which are expanding on its home turf.

“Everybody’s come into our space and that’s the reality of what’s happening in the worldwide market place,” CEO Bernie Brookes said. “It’s a tough retail environment, and the subdued consumer sentiment is expected to continue.”

“Consumers continue to be quite frugal ... and continue to make things last a bit longer: the lounge, the frock, right the way through to the TV. They are worried about employment, shares, electricity, health and education costs.”

On a conference call with analysts and the media, Brookes said Myer would beef up its own online presence and planned to take online sales to A$300 million, or around 10 percent of total sales, within 5 years - from around A$31 million last year.

JANGLED NERVES

Even as Australia’s economy grew 3.7 percent in the last quarter from a year earlier and unemployment hovers near just 5 percent - strong by developed country standards - consumers remain in a funk over Europe’s debt crisis and slower growth in the United States and China.

The Reserve Bank of Australia (RBA) held interest rates at 3.5 percent this month, but markets are pricing in a rate cut as soon as October. Easings in May and June, however, were not fully passed on by banks to those with loans, and did little to boost retailers’ takings.

“It will take a longer period of global financial stability to calm the jangled nerves of Aussie shoppers,” said Savanth Sebastian, economist at CommSec.

Since early 2009, sales volumes at department stores have declined by around 6 percent, RBA Deputy Governor Philip Lowe said, in part as online sales make pricing more transparent.

“Many Australians have worked out that prices charged by domestic retailers for certain goods are higher than those charged by overseas online retailers. This is causing a rethink of business models, and retailers are having to make changes to the way they run their businesses,” Lowe has said.

Myer said its same-store sales in the fourth quarter to July 28 nudged up 0.3 percent - the first rise in nine quarters - as it benefited from government handouts and trimmed its discounting. Brookes cautioned that the small rise was not “the start of a significant turnaround in consumer confidence.”

GLOBAL TREND

Myer’s net profit fell 3.3 percent to A$52 million in the second half before one-offs, according to Reuters calculations from reported full-year figures. That beat forecasts for a 5.6 percent fall. Full-year earnings fell 14.3 percent to A$139.3 million. The company had flagged a fall of up to 15 percent.

Myer and its closest rival David Jones Ltd are part of a global trend that has seen department stores particularly hard hit. British retailer Marks & Spencer slashed its sales growth forecast earlier this year and invested less in selling space due to the growing popularity of online shopping. Sears Canada Inc last month reported a wider loss as sales dropped.

Retailers dominate the 10 most heavily shorted stocks on the Australian bourse, and data from independent research firm Zenith Investment Partners shows 8 of the top 10 short interest stocks over the past year are consumer discretionary stocks. Myer is among the cheapest in about 60 stocks in the global multi-line retail sector on a forward price to earnings multiple, and ranks highest for dividend yield, at about 11 percent.

David Jones said last month its same-store sales dropped 1.3 percent in the fourth quarter, and it warned that second-half earnings could fall by up to 40 percent as it invests in a costly overhaul.

Before the results on Thursday, analysts were predicting Myer’s net profit would fall 5.9 percent in the fiscal year to next July, to A$131.1 million.

“The big department store model of David Jones and Myer, where they have to hold billions of dollars worth of inventory and stock - it’s just an old model now and that’s why you see them increasingly under pressure,” said IG Markets’ Peacock.

$1 = 0.9587 Australian dollars Reporting by Miranda Maxwell in MELBOURNE and Wayne Cole in SYDNEY, with additional reporting by Anshuman Daga in SINGAPORE, Reshma Apte in BANGALORE and Victoria Thieberger in MELBOURNE; Editing by Ian Geoghegan

Our Standards:The Thomson Reuters Trust Principles.
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