A stockpicker's guide to Myer Holdings Ltd in 2014

A 7% dividend yield is nice but management issues need to be sorted out.

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In 2014 Myer Holdings Ltd (ASX: MYR) and its rival retailers face an uphill battle to grow earnings and revenue in an increasingly competitive industry. Not only will the likes of Myer and David Jones Limited (ASX: DJS) face earnings risk from a new wave of international brands opening stores in capital cities, but quick-footed online-only competitors will continue to erode bricks-and-mortar market share.

History

Myer was relisted on the ASX in 2009 after being taken private in 2005 by private equity group Northbridge Capital. The company's real-estate assets were sold off and an ambitious store rollout plan was put in place to deliver earnings growth. Since relisting, revenues have decreased by 16% while earnings have dropped by 12%, as the fallout from the GFC sapped consumer confidence and spending.

2014 to-do-list

Aside from improving sales revenue and margins, the most pressing issue for Myer in 2014 will be to find a replacement CEO for when Bernie Brooks leaves in August. In order to help with the process, and to address the board's lack of retail experience, Myer recently employed Bob Thorn (ex-managing director of Super Retail Group) and Ian Cornell (head of management and marketing at Westfield) as non-executive directors. This should be a positive development and give shareholders greater faith in the company's management.

From an operational perspective, Myer owns a number of the brands it sells in-store and online. Private label brands account for around 20% of sales and generate higher margins. One would imagine however, that in order to sell private brands Myer must first concentrate on getting customers into the store. To do this, retailers seek exclusive deals with big-name fashion designers to sell their products in Australia.

Big-name labels

Three big-name labels under Myer's control are Jennifer Hawkins' clothing range, makeup group Napoleon Perdis, and Alex Perry's fashion range (which was recently poached from David Jones). These deals are important to get feet through the door so to speak.

Financial outlook

Unlike rival David Jones, Myer is predicted to grow earnings in FY14 and FY15 after hitting a low point in 2013. Earnings per share growth of 3.5% and 6.1% are expected on fairly flat revenues as competition heats up in the small Australian market.

Foolish takeaway

Australia's traditional retailers have a fight on their hands to maintain market share and grow earnings in the coming years, as online sales increase and competition from international brands intensifies. Myer is reasonably well placed, with a decent online platform and strong customer base, but will need to work through management issues and stem falling revenues if shareholders are to be rewarded. One positive is that earnings are expected to grow this financial year and the company offers a very healthy dividend yield of around 7%.

Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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