Was anyone really surprised at Myer’s [ASX:MYR] recent profit downgrade?
Instead of losing $16 million in the second half of the financial year, CEO Bernie Brooks reckons the firm will lose $24 million.
As the share price tanked on this news, The Australian wrote:
‘That is an effective 13 per cent cut in forecast second-half earnings and, if it is as bad as Brookes fears, will push down earnings before interest and tax to about $225m this year, about 17 per cent below 2010 year levels.’
Importantly, the article also notes ‘Myer has not grown sales per square metre for more than a decade and in the past two years these have fallen so the latest blip is not exactly a surprise.’
Clearly, this was something shareholders forgot when they forked out $4.10 a share when Myer floated back in 2009.
As of Friday, the stock was trading at half its initial listing price.
However, the department store chief keeps blaming everyone but the management team. It’s the middleman. It’s the internet. It’s the carbon tax. It’s consumer sentiment…
That old one. The fact that people just aren’t shopping has become a reason for many retailers reporting lower profit numbers, if not outright losses. Look at the chart below of Aussie consumer confidence.
It’s just hovering below zero in Australia. This, if you consider that it dipped below minus 5 last year, is starting to look like an acceptable number.
It’s a simple concept to understand. A positive score, something above zero, means people feel confident about their income and financial situation. Like their job security and asset position. However a negative score suggests people aren’t so sure what their financial future holds.
So here’s why this is important: the more positive the number, the more likely people are to spend money.
But is this really the reason people aren’t flooding Myer stores around the country? No, it’s not.
Let’s compare Australia’s consumer confidence index to the UK’s just for a moment.
The UK consumer confidence index is at minus 30! And has been negative for almost a decade. So things must really bad for UK department stores.
And yet, the big department stores there are still turning a profit. What’s more refreshing is they’re not blaming anyone. Most are just getting on with business.
For example, take a look at two of the biggest department stores listed on the London Stock Exchange, Debenhams [LON: DEB] and Marks and Spencer [LON: MKS].
Myer reported a 3% drop in net profits for the 2011 financial year. And based on this week’s announcement, you know a loss is coming for this financial year. Yet compare that to Marks and Spencer. It increased net profit by 12% in the same period, and has managed a healthy 2% increase in turnover.
Debenhams isn’t far behind. After-tax profit for the company increased £20 million in 2011. Already half-year results for the company show turnover is up 1.4%.
How is it possible that these companies are profitable? Britain has seen two quarters of negative gross domestic product growth, putting the country back into a technical recession.
And, back in 2008 when the UK first entered a recession, both businesses still made a profit. Yes, profits shrank from their 2007 level. But in a recession, both still ran profitable companies.
Even though the Aussie economy is ‘only’ slowing, our largest department store can’t get the books into the black. And Mr Brookes won’t even offer a projection on what 2013 might hold.
In fact, in the time Myer’s share price halved, M&S is up 50%. And Debenhams? Its stock price is up 139%…
These two companies have increased profits during a time when consumer confidence is 10 points away from the low.
Ditching A Dud Stock
So despite the UK economy’s problems, both companies have delivered profits and capital growth, unlike the 100-year-old Myer store.
So, what’s Myer’s problem?
It’s simple. There’s no foot traffic. If people aren’t going into the stores, they can’t buy anything. And they certainly can’t buy much from the lame Myer online store.
Considering Myer’s been around for over a century, the company must have faced tougher retail periods (the Great Depression and two world wars spring to mind). Yet the management team still can’t deliver goods a shopper wants, or financial results an investor needs to keep holding shares.
Overseas retailers can provide profits for investors, in much tougher economic situations.
Things aren’t looking good for investors in Myer right now. Do you really still want to have this retail stock in your portfolio when the end of financial year results are due? Probably not.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
Investors have tagged Australia the “great southern province of China” in recent years. This is due to the huge boom in Chinese demand for resources like iron ore and coal. But it also gives a clue to how hedge funds and global fund managers see the Australian economy and the Aussie dollar. They see it as nothing more than a proxy for Chinese growth. If China falls, Australia goes with it.
There is a lot of evidence that the Chinese economy has many problems. Bad news out of Beijing will see lower Aussie stock prices and a lower Aussie dollar. One way to hedge this scenario is to find an investment with as little connection to Chinese growth as possible. But are there any resources like this? Yes. Which one? Kris Sayce identified it this week in: Free of the Dragon: Why the Energy Market Doesn’t Need China
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Lars Henriksson on How Chinese Stocks Are Fading Fast: “China operates a closed capital account and non-convertible currency meaning that liquidity cannot be pulled by investors on short notice, as was the case in the Asian financial crisis. Instead of a short and sharp crisis like in 1997, I envisage a prolonged downtrend – like Japan’s economy – as the financial system slowly digests poor loans and misallocation of capital.”
Dr. Kent Moors on LNG: Why Australia Will Be a New Global Gas Leader: “It seems that Australia has significantly more shale gas than originally thought. It remains too early to estimate how much of this will find its way onto the market, or the time it will take to construct the necessary infrastructure, develop the field systems, extract, and process the gas.”
Matthew Partridge on A “Turning Point” for the Chinese Economy …and Australia: “A slowdown in China should have a big impact on its ’51st state’ – Australia. While China’s massive demand for resources has shielded Australia from the global financial crash to a great extent, this is now set to go into reverse. This would be bad enough even if Australia was in a hugely sound economic state. But it’s not.”
Kris Sayce on Why a Stock Market Crash is Great News For Shale Gas Investors: “The stock market has crashed. This makes it an excellent time to find the best stocks for the next twelve months. A crashing market creates a great opportunity to buy some truly disruptive energy companies… We’re talking about investments in natural gas. And more specifically shale gas. But why are we so sure now is the time to buy?”
Why Myer is the One Retail Stock You Don’t Want in Your Portfolio
