Myer chief executive John King says the retailer may be able to resume paying dividends by the end of the financial year after returning to profit in the January-half, albeit with the help of wage subsidies and rent waivers.
Myer’s underlying interim profit rose for the second consecutive year after $67 million in wage subsidies and rent waivers and strong online sales growth offset the impact of store closures and weak foot traffic in its CBD stores.
Underlying net profit for the six months ending January rose 8.4 per cent to $42.9 million, bolstered by $50.7 million in JobKeeper subsidies (a $32 million net benefit) and $15.8 million in rent waivers, which reduced its wages bill and occupancy costs.
Bottom line net profit jumped 76 per cent to $43 million, with one-off costs for restructuring and redundancies, the closure of clearance floors, brand exit costs and asset impairments falling to just $0.2 million compared with $21.6 million in the year-ago period.
Myer continued to withhold paying a dividend under the terms of its banking covenants.
However, Mr King told The Australian Financial Review on Thursday the company might be able to resume dividends in six months.
“I want to get the company back to paying dividends at some point in the near future ... let’s get to the year end and see where we are,” he said.
While Myer returned to profit (it lost $11 million before one-off costs last year after a weak second half) sales and gross margins were weaker than expected and the shares fell 10.6 per cent to 29.5¢ in early trade on Thursday.
Total sales fell 13.1 per cent to $1.39 billion, dragged down by store closures in Melbourne, where metro store sales plunged 49 per cent, and reduced footfall in CBD stores.
Same-store sales fell 3.1 per cent, similar to that in the previous January-half. Comparable store sales in CBD stores fell 32 per cent but sales in stores outside six key CBD locations rose 6.3 per cent as customers working from home favoured shopping at suburban and regional stores.
Online sales rose 71 per cent to $288 million - undershooting the growth achieved by other major omni-channel retailers - fuelled by strong demand for cosmetics and menswear. Online sales reached 21 per cent of total sales, double that a year ago.
“For us in the short term we’re targeting up to 40 per cent [of total sales] over the next three to five years,” Mr King said.
Morningstar analyst Johannes Faul expects Myer’s sales to rebound strongly in the July-half, growing more than 20 per cent as Myer laps the 31 per cent decline in the previous corresponding period. This would lift sales for the 53-week period ending July by 4 per cent.
Earnings before interest and tax in the January-half rose 2.7 per cent to $109.2 million. Cost of doing business fell 21 per cent, or 7 per cent excluding wage and rent subsidies, helped by $14 million in head office savings, lower marketing costs and cheaper fulfilment costs.
Myer shifted to a third party logistics model for its online business last year. The cost of fulfilling online orders through the 3PL model is 60 per cent less than the cost of fulfilling orders from stores.
However, gross margins fell to 38.6 per cent from 39.16 per cent. Like most of its competitors, Myer cut down on promotions but had to aggressively clear stock left unsold after store closures in Melbourne, contributing to a 22 per cent drop in inventories. It also bought less stock generally, leading to less support from suppliers.
“Myer is one of the few retailers to not benefit from an industry-wide reduction in promotions,” said Citi analyst Bryan Raymond.
The profit results will be closely scrutinised by Premier Investments chairman Solomon Lew, who forced former Myer chairman Garry Hounsell to resign from the board hours before the annual meeting last year and has called on the entire board including chief executive John King to step down or be sacked. Myer is still searching for a new chairman to replace interim chair JoAnne Stephenson.
Mr Lew has been attempting to take control of the board since Premier Investments bought a 10.8 per cent stake at $1.15 a share almost four years ago.
Myer shares fell to a record low of 8¢ last March but regained some lost ground in 2020, closing at 33¢ on Wednesday, amid a growing view Mr King’s five-year Customer First turnaround plan is gaining traction despite the pandemic.
Mr King’s strategy involves slashing costs and inventories, pulling back on discounting, replacing underperforming brands with new labels including house brands, ramping up online sales and reducing excess floor space by 110,000 square metres by closing stores or handing back excess floor space to landlords.
Mr King has had to adapt the strategy - ramping up online sales and store rationalisation plans and cutting costs even harder - because of the pandemic.
Myer was forced to temporarily close all 60 stores last March and April and 11 Melbourne stores for three months between August and October. Foot traffic at CBD stores, which once generated the bulk of profits, remains well down due to the lack of domestic and international tourists and foreign students.
“The first half result reflects several positive achievements including the continued strength of our online business, now representing 21 per cent of total sales, as well as sustained disciplined management of costs, cash and inventory,” Mr King said.
“We have now delivered five consecutive halves of reduced operating costs which, combined with a significantly improved balance sheet, has ensured the company was able to withstand this challenging operating environment.”
Mr King said Myer still planned to cut floor space by 110,000 square metres in the next few years but some suburban stores that were due to close as leases expired in a year or two had received a ‘reboot’ by COVID.
Myer shrank floor space at the Cairns and Belconnen stores last year and recently announced it would shrink its Morley store in Perth and Highpoint store in Melbourne from four floors to three in March and June.
Mr King plans to expand the range and staffing levels for big brands such as Tommy Hilfiger, Ralph Lauren, RM Williams and Maxwell & Williams while continuing to grow Myer’s house brands.
The retailer also plans to invest more into the MyerOne rewards program, which has 5 million members who account for 69 per cent of total sales. Myer is using MyerOne data and insights to improve buying and make personalised digital offers to customers, replacing mass marketing.
Myer’s free cash flow improved by 29 per cent to $273 million as inventory levels plunged and capex declined, lifting net cash to $201 million, up from $148 million in the year-ago period. However, the cash balance has fallen since the end of January as the retailer invests in new season stock.
Gross borrowings fell to $80 million at the peak during the January-half compared with $220 million a year ago.
Chief financial officer Nigel Chadwick said Myer had substantial headroom in all covenants over the next few months. Last August the retailer extended a $340 million debt facility with lenders until August 2022, but it has only drawn down a small portion of this facility.
Citi’s Mr Raymond retained his buy rating and 40¢ target price, despite weaker than expected gross margins and online growth..
“Despite less leverage to the better promotional backdrop, the balance sheet seems very well placed with a strong net cash position, well inside covenants,” Mr Raymond said.