Because of the rather dubious 2009 float, with its steep initial share price and the underperformance that has naturally followed in the years since, many investors are likely to be skeptical of department store chain Myer (ASX: MYR).
Yes, Myer was a dud stock. But I want to suggest that, today, such a view is out of date.
Why you should take a fresh look
Forget, for a moment, what you think you know about Myer. Now, let me tell you about a preeminent Australian retailer with modest sales growth, best-in-class margins, a manageable debt load, and a store network that’s just the right size. Most importantly, the shares are relatively cheap, at less than 11 times earnings, and pay a dividend yield of 7.2%, or over 10% when grossed up to include franking benefits.
From this perspective – looking at Myer’s situation and valuation today – it’s hard not to think that the shares will outperform the overall market in the next three to five years, and possibly beyond. The dividend alone will get investors the best part of the way to an average annual market return!
Assessing the core business
Myer operates some 67 stores in prime locations across Australia, with Queensland and Western Australia the best performing markets. The company’s loyalty program – Myer One – has over 5 million members, and 70% of all sales come from those members. Myer also gleans extensive customer data from the program leading to its “increasingly sophisticated” understanding of customer habits and preferences, and which informs all decisions related to stores.
Sales grew 1.7% for the first half of 2013, and third-quarter sales grew by 0.5%. Myer’s growth is outpacing that of David Jones (ASX: DJS), which saw first half 2013 sales growth of less than 1% and negative growth for the third quarter. Myer also boasts significantly greater gross and net margins, in part due to Myer management’s decision to exit lower margin categories and focus on exclusive brands in store – such brands now constitute 20% of sales. Myer’s gross margins have expanded by some five percentage points since 2007.
Online shopping is often cited as a key long-term threat to bricks-and-mortar retailing, but investors must also keep in mind the way it can boost traditional retailers’ margins and results as well. For its part, Myer has made “building a leading omni-channel offering” a strategic priority.
CEO Bernie Brookes, formerly of Woolworths (ASX: WOW), has been in the chair since 2006 and owns nearly 2% of Myer shares, meaning that a significant portion of his personal wealth is tied up in the company and that maintaining the dividend is likely to be an important matter to him.
At current prices, Myer shares present a compelling value. It’s true that there’s no short-term catalyst for a re-rating of Myer shares – there’s little reason to foresee a blowout half coming down the pike soon. Still, patient investors are likely to be rewarded over time between the value price and the hefty dividend. Stick this department store in a diversified portfolio.
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