Bernie Brookes reckons he and his executive team have done everything they can to get Myer's revenue and profit lines flying. The problem is, everything isn't enough right now.
When Myer listed at $4.10 a share on November 2 and began a slide that took the shares as low as $3.12 in the first week of February, there were 206 investors holding more than 100,000 shares, and 59,131 holding fewer than 100,000, including 52,627 who held 5000 shares or fewer.
Myer's shares were heavily traded in the days after the float and the percentage of shares held by retail shareholders has declined from about 50 per cent to 40 per cent. Those that remain do not appear to be disillusioned, however. Retail investors were, for example, net buyers of Myer shares yesterday as they eased 3¢ to $3.44 on news of an 11.9 per cent rise in profit before interest and tax in the January half, and unchanged guidance for full-year earnings despite a cut in expected sales growth.
But shareholder focus groups Myer regularly runs reveal that the retail investors are also unfamiliar with the details of the 50-month profit growth plan that Brookes implemented 44 months ago.
If the owners of 40 per cent of Myer aren't familiar with Brookes' plan, the rest of the market isn't either. That means that Myer's shares will struggle until he delivers the final element of the plan, by lifting Myer's sales momentum.
The plan that Brookes rolled out after the TPG group acquired Myer from the Coles group in mid-2006 was quite logical. Firstly, drive profits higher by taking costs out of Myer. Then, when the cost-reduction process is coming to an end, introduce a second phase of profit growth by progressively boosting revenue, mainly by opening new stores, and renovating old ones, including the flagship Myer Melbourne store.
The sequencing of the plan was important. By getting Myer's cost base down first, Brookes boosted profitability, increasing the profit-making power of the higher sales that were to come.
Myer's earnings before interest and tax (EBIT) as a percentage of sales rose from 2¢ in the dollar in mid-2006 to 7.2¢ in 2008-09, and in the latest January half the margin was 10.05¢ in the dollar, up 90 basis points from a year earlier.
The January half contains the Christmas and New Year trading period and is always much more profitable than the second half, but the latest result points to a full-year EBIT margin of at least 8 per cent.
That is getting Myer close to global good practice after years of underperformance. Myer's well-run Australian department store rival, David Jones, generated an EBIT margin of 9.9 per cent in the year to July last year, for example. Britain's Debenhams group achieved a 9.5 per cent EBIT margin in the year to August, Marks & Spencer ran at an 8.6 per cent margin in the half-year to September, US-based Kohls achieved a outsized 12 per cent EBIT margin, and the upmarket Seattle-based department store chain Nordstrom generated a margin of 10.6 per cent.
Brookes said yesterday that costs could come down a bit more, and another 1 percentage point of margin expansion is slated to come from that source over the next couple of years.
But the group is now at the point where revenue growth must take over as the big profit-growth generator, and in yesterday's result it did not: sales rose by 2 per cent, and while Myer maintained its full-year profit guidance, it lowered guidance on sales growth, from the 3 per cent rate forecast in the float prospectus, to 1 to 2 per cent.
Brookes is battling to hold the sale line because Myer is no longer benefiting directly from the big spending packages the government launched in late 2008 and the first half of 2009, but there are initiatives in train to enable the unchanged target of full-year earnings before interest or tax of $261 million to be reached.
Gains will come as the group shaves the cost base a bit further, with in-store CCTV that cuts shoplifting, and as it introduces new point of sales terminals. It is also expanding higher-margin house label sales (their share of sales have risen from 15 per cent to 17.5 per cent in the past 18 months), refreshing in-store presentation, and pulling together special marketing initiatives with suppliers: sales of electronics goods were weak in the first half and are getting special attention.
The key to a share price recovery, though, is demonstrably stronger sales growth that fuels earnings. Annual sales growth of 5 per cent is the goal, and Brookes plans to get there in 2011.
He should do it. The plan calls for 15 new stores to be opened in five years, and each one will add about $30 million of new revenue, or about 1 percentage point of revenue.
The first two, at Top Ryde in Sydney and Robina in Queensland, open in the second half of this calendar year. And another $70 million, or 2 percentage points, of revenue growth is expected as the renovated Bourke Street flagship store in Melbourne progressively re-opens for business in the second half of this year. The sales growth that is in the pipeline, when it materialises, should haul Myer's shares back towards the float price. It can take it beyond it if Brookes holds Myer's profit margin above 8 per cent.
