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Myer Holdings Ltd sees improving sales but a major danger lurks

Credit: Atilla2008

Department store operator Myer Holdings Ltd (ASX: MYR) has today reported a 2.1% increase in sales for the March 2016 quarter, with same-store-sales up 3.4%.

The company also says year-to-date sales are up 1.9% to $2,470.3 million – up 3.3% on a comparable store basis (which excludes new or closed stores).

Myer CEO Richard Umbers said, “These results build on our first half performance. We believe they further demonstrate that New Myer is moving in the right direction and that our customers are responding well to the New Myer strategy.

However, the company also says that there are dark clouds hovering. Unseasonably warm weather has contributed to subdued sales of winter product, and the 2016 Federal election campaign occurs during a key trading period. Outdoor adventure wear retailer Kathmandu Holdings Ltd (ASX: KMD) could also face a slump in sales if the unseasonal warm weather continues.

Myer anticipates a negative impact on consumer sentiment during this period – but says it is hard to quantify. The retailer is still forecasting net profit for the 2016 financial year (FY16) to be between $66 and $72 million (excluding $20-$30 million of pre-tax implementation costs of New Myer).

Myer reported an underlying net profit of $77.5 million in FY15, down 21.3% on the prior year, and FY1 is expected to be lower again.

The company may be running as hard as it can to improve sales and cut costs, but the trend suggests department stores are in structural decline and the writing is on the wall. If it’s not already clear, then results in the US might be an even clearer indicator.

Global retailing giant Amazon is slowly grinding US department store retailers into the dust. Macy’s, JC Penny, Target, Kohl’s, Nordstrom and even Walmart are being hit by Amazon’s move into selling almost anything online.

Amazon currently only sells books in its online Australian store, but the retailer could bring its US model here – which would be a massive threat to existing department store retailers Myer and David Jones.

Foolish takeaway

Myers’ share price might look cheap at $1.12, having fallen 70% over the past decade, but they could still fall 100% from here.

Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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