Myer Holdings (ASX: MYR) chief executive Bernie Brookes has expressed his concerns that the proposed increase to the Medicare levy would likely have a negative effect on store sales, considering it would be the company's direct customer base that would be effected.
The federal government's proposition to increase Medicare levies by 0.5% would cost the average wage earner an additional $350 annually, meaning less disposable income for consumers to spend at retailers such as Myer, David Jones (ASX: DJS) or JB Hi-Fi Limited (ASX: JBH).
Whilst the increased levy could indeed affect sales, the company has also heavily focused on cost reduction in order to return to a position of higher profitability. For instance, Myer exited from selling low margin products such as DVDs and music, increased its own online sales and pushed its rewards program to encourage loyalty to the group. Furthermore, the company will continue to decrease the physical size of its stores to reduce rent costs whilst also increasing profitability per square metre.
Brookes admitted that retail sales had been less volatile this year when compared to recent times, when brick and mortar store sales were being heavily affected as consumers flocked toward the cheaper and more convenient offers from online stores. Having expanded its suite of exclusive brands, Myer realised better-than-expected sales growth in its half year report, recognizing $1.7 billion in sales.
Since its low of $1.525 in June, Myer has gained an astonishing 97% to cease trading on Thursday at $3.01, as the future of one of Australia's largest retailers looks more promising to investors.
Foolish takeaway
Should the increase to the levy be passed, consumers may well decrease their spending for the short-term, however, Myer's reduced costs should be passed onto consumers through lower prices, which would again encourage spending. Retailers have overcome much more difficult circumstances in recent times, and this proposition should be no different.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
