Long-term investors in Myer Holdings Ltd (ASX: MYR) should look away now!
The chart above shows the underperformance of Myer compared to the S&P/ASX 200 (ASX:XJO) (Index:^AXJO). Over the past five years, the share price of Myer has fallen by more than 64% compared to the 23.7% gain by the broader market. While dividends have been paid during this time, investors would have been better off investing their money in term deposits.
The current share price is hovering around all-time lows but investors may be lured in by the attractive dividend yield and cheap valuation. I believe there may be more pain for Myer shareholders and here are four reasons why I think investors should avoid buying Myer shares:
1. Sales growth has been disappointing over the past several years despite investment in new initiatives. Myer recently provided a third quarter sales update that showed year-to-date sales growth of only 1.7%. Comparable same store sales showed growth of only 1.1%. The poor sales growth was attributed to a number of factors including weaker trading conditions in Western Australia and Queensland following the slow down in the mining sector.
2. In recent years, cost growth has outpaced sales growth resulting in pressure on margins and reduced profitability. Although Myer is still operating on relatively high margins, competitive pressures and the depreciation of the Australian dollar have also been reducing gross operating margins.
3. Many online only competitors have a much lower cost of doing business (CODB) as a result of lower overheads and this gives them a competitive advantage over Myer.
Myer's CODB increased by 6.2% in its first half results and management are forecasting costs will be $15 million more in the second half of FY15 compared to FY14. Although Myer is undertaking a strategic review of its operations, its cost base will need to be reduced dramatically if profitability is to increase substantially.
4. Changing consumer behaviour was recognised much earlier by Myer's competitors who moved quickly to accommodate this. Consumers in Australia have been willing to embrace online shopping over bricks and mortar as they focus more on price and convenience.
Myer was slow in developing its online offering and has been playing catch-up ever since. There has been fierce competition within the online retail market with popular overseas operators now targeting Australian consumers directly by offering free shipping and free returns. Myer has also been losing market share to other retailers who are providing a more customer friendly experience and offering specific products to their target market.
While Myer has been working hard to improve its omni-channel offering, it is still struggling to compete against its more established online rivals.
Foolish takeaway
Investors should not be lured into investing into Myer by the attractive dividend yield or cheap valuation. There are fundamental issues facing Myer and I would suggest investors remain on the sidelines until sales and profits start trending in the right direction.
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