Myer Holdings Ltd (ASX: MYR) is today worth 18% less than it was just 20 days ago. So is one of Australia's favourite retailers a screaming buy or a disaster waiting to happen?
The Facts
Myer's business has deteriorated significantly since 2010, have a quick read of these stats:
- Net profit has fallen from $163 million to $98 million;
- Revenue has fallen from $2.92 billion to $2.74 billion;
- Net gearing has increased from 36% to 39%;
- Return on equity has fallen from 19% to 11%; and
- Operating cashflow has fallen from $241 million to $191 million.
Case 1: The Screaming Buy
Myer is currently trading on a trailing price to earnings ratio of just 12, and a trailing dividend yield of 7.1% fully franked (10% grossed up). Analysts are expecting Myer to maintain or moderately grow earnings over the next 12 months, which would indicate that the current dividend yield is sustainable for 12 months at least.
Myer plans to spend more to grow its stable of exclusive brands in order to drive revenue growth and allow the company to better compete with online-only fashion groups. This point of difference is what could be the turning point for the retailer!
Case 2: The Falling Knife
But will spending more on exclusive brands actually help?
Analysts note that the influx of overseas brands into the Australian market will continue to make trading difficult for Myer, and it doesn't appear as though online retailers are going to go out of business any time soon.
Myer's share price has been pummelled due to concerns that rising capex will increasingly eat into profits and lower return on equity further. The current return on equity of 11% is well below competitors and experts note that this is one of the main reasons for its low price to earnings ratio.
Store openings and refurbishments are expected to boost revenue by around $100 million this financial year, however without the impact of new store openings and refurbishments in subsequent years, the future is less certain.
And The Winner Is….
I suspect that in time Myer will likely be reduced to a lesser player in the Australian market and could be acquired by an international or local rival. The problem Myer has is that it doesn't have any of the qualities that great investors like Warren Buffett search for in a retail company.
