As I wrote here earlier this month, retail stocks are in a world of pain as the imminent arrival of Amazon and weak consumer sentiment wreaks havoc on the industry’s bottom-line.
The pain is being felt across all retail sub-sectors given the likes of OrotonGroup Limited (ASX: ORL), RCG Corporation Ltd (ASX: RCG), Coca-Cola Amatil Ltd (ASX: CCL), Automotive Holdings Group Ltd (ASX: AHG) and AP Eagers Ltd (ASX: APE) have all issued profit downgrades in recent times. This is despite all these companies trading in different and varying retailing sub-sectors, indicating that the negative consumer sentiment is taking a toll on the entire industry.
Whilst most media headlines will have you believe its all doom-and-gloom on the retail front, I believe there remain some bright lights in the industry. None more so than Myer Holdings Ltd (ASX: MYR).
Like most retail stocks, Myer’s shares have been punished during the mass exodus of investors from the retail sector.
Its shares are down 36% since the start of the year, after slumping over 6% during trade on Thursday, as UK-based fashion chain Topshop (a company in which Myer has a 20% stake) revealed its Australian operations entered into voluntary administration.
Although part of Myer’s year-to-date sell-off can be attributed to a drop in same-store-sales for the third quarter (amongst other things), I believe Thursday’s closing price of 87.5 cents per share presents excellent value for the century old department store.
A new breed of retail
I’ll be the first to admit that Myer is no longer the department store it was five years ago. However, it has caught up with the times through large-scale investment in its online website and an increased focus on customer service to win customers back to its stores.
New management has also started closing underperforming stores and discontinuing old stock lines so that the company remains agile and able to adapt to retail conditions quickly.
So far, this strategy is working well, with the company reporting net profit (NPAT) growth for the first time in years following its first-half of 2017 trade. Although total sales and same-store-sales have dropped slightly for the financial year to date, management’s resolve to report NPAT and earnings (EBITDA) growth for the full-year has seen the company reiterate and maintain guidance. This is something that very few other retailers have managed to do.
Whilst I’m aware that management could swiftly retreat on its guidance for NPAT and EBITDA growth, the crucial reason why I’m optimistic on Myer’s prospects is because of its potential as a takeover target.
As Australia’s oldest department store owner, Myer has amassed a lucrative property portfolio in key sites across Australia. In fact, in its half-year results, Myer reported its net tangible assets backing was 28 cents per share – most of which was property related.
Accordingly, I’d imagine any further downside to its share price could bring bidders like substantial shareholder Premier Investments Limited (ASX: PMV) and private equity firms out of the woodwork to make a tilt at the company.
Of course a takeover offer may never ensue for Myer leaving the stock to trade sideways for an extended period of time. Even worse is the scenario where Myer’s management announces an unexpected profit downgrade, which pushes the stock to junk territory and makes its shares worth far less than they are today.
However, putting these risks to one side, I believe Myer’s resurgent management, reiterated earnings guidance, prospects of a potential takeover and its discounted share price is reason enough to take a punt on the stock today.
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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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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