Shareholders in Myer Holdings Ltd (ASX: MYR) should look away now! Just when you thought the embattled department store operator had turned a corner, the stock crashes 6.8% to a record low of $0.76 in early trade after management downgraded its profit forecast.
The latest update will leave investors feeling that there's no light at the end of the long dark retail tunnel with management warning that the company is likely to miss its FY17 net profit forecast of more than $69.3 million and making big write-downs in some of its investments – ouch!
Myer now expects net profit to range between $66 million and $70 million for the last financial year and its initial claim that earnings before interest, tax, depreciation and amortisation (EBITDA) growth will exceed sales growth is now thrown in doubt.
The company is blaming weaker-than-expected trading conditions during its June-July stocktake sales events for the downgrade. This sales event is an important period for generating profit for the company and the poor performance could well indicate that its "New Myer" strategy is faltering. The "New Myer" strategy was the brainchild of Myer's chief executive Richard Umbers and his deputy Daniel Bracken.
The fact that Mr Bracken has fallen on his sword and will leave Myer is likely to put further suspicion on the effectiveness of the "New Myer" initiative, which aims to increase foot traffic into the stores and lift the average transaction value (the amount of each sales transaction).
The bad news doesn't stop there. Myer is writing down its entire 20% holding in the Australian franchise of TOPSHOP TOPMAN worth $6.8 million, after that business went into administration.
It will also take a $38.8 million impairment charge on sass & bide due to the continued poor performance for the retail brand, despite Myer's efforts to turn that around.
The downbeat update from Myer contributed to the sell-off in discretionary retailers today, with the sector sinking 0.6%. The likes of Super Retail Group Ltd (ASX: SUL) and Harvey Norman Holdings Limited (ASX: HVN) are contributing to the weakness. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is trading 0.5% higher.
Myer may look cheap on current valuations but you should resist the temptation to bargain hunt as the stock is increasingly looking like a value trap as the company's turnaround strategy doesn't appear to be paying off.
Myer needs a "Plan B" and until we know what "Plan B" is and are confident that it will be better than "Plan A", I would be reluctant to buy the dips when there are better options out there.
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