Myer: Running to stand still

Myer Holdings Limited (ASX: MYR) today confirmed what the market had been fearing; retail sales are still falling. Myer today announced its first half results ending January 2012, with net profit down 17.5% to $88m.

Like-for-like sales fell for the seventh consecutive quarter, declining 1.7% in the three months ended January. On top of weak sales, the company was also hit with higher rent, labour and depreciation costs.

Myer declared a fully franked interim dividend of 10 cents, which they probably should have hung on to, as they might need the cash if sales keep falling. It forecast full year 2012 net profit after tax to be no worse than 10% below 2011’s result of $162.7m.

Exiting electrical categories

Myer lost $22m in sales in the first half, due to category exits (consoles and gaming are going) and rationalisation of white goods, music, DVDs and navigation systems. The company is replacing the lines with higher margin categories, highlighting the extent to which many of these products have become commoditised with consumers shopping around for the lowest price. Myer simply can’t compete with those companies offering the lowest price, such as JB Hi-Fi Limited (ASX: JBH), Harvey Norman Limited (ASX: HVN) and a host of online stores.

Stuck in no-man’s land

The major issue confronting Myer is that many of the company’s categories do not cater to a specific clientele. They are neither the cheapest, nor do they offer a multitude of higher priced (and higher margin) exclusive products in the same way David Jones Limited (ASX: DJS) does. It’s no real surprise that the best performing categories were Miss Shop (Youth), Women’s wear, Children’s wear and Cosmetics.

It appears that Myer is doing as much as possible to turn things around, with a focus on customer service, rationalising product lines, more exclusive labels (Myer acquired a 65% holding in sass & bide and expects to finalise the acquisition of Trent Nathan in the near future).

The company also closed two stores, and is pursuing a number of other strategies to improve profitability. Time will tell whether these strategies deliver on expectations.

The Foolish bottom line

The company is currently trading on a forecast P/E of 9.7, and paying a fully franked dividend yield of 8.7%, should it meet its goal of net profit of not less than $146.4m (meeting its forecast of last year’s profit less 10%). While that might look inviting, with $420m of debt, it’s too risky for me, and I’ll be sitting on the sidelines watching this one play out.

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Motley Fool contributor Mike King owns shares in JB Hi-Fi.  The Motley Fool ’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Click here  to be enlightened by The Motley Fool’s disclosure policy

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