After a challenging FY24, with cost-of-living pressures leading to a 3% drop in sales by 3% to $3.2 billion, with net profit after tax down 26% to $52.6 million, Myer (ASX: MYR) could be on the cusp of a rebound.
Since listing in November 2009 at an offer price of $4.10, the 125-year-old retailer progressively shed 97% of its value by March 2020, and has since bounced up to $0.79 a share.
While there have been many failed attempts to turn Myer's fortunes around in recent years, brokers were genuinely excited by the recent merger with the Apparel Brands division of Solomon-Lew controlled Premier Investments (ASX: PRE).
Merger details
The merger deal announced last August adds 719 stores to Myer’s 56 stores and expands the portfolio of labels to include those appealing to young adults in Jay Jays and Dotti to older women with Jacqui E. Those chains, known as Premier’s Apparel Brands, also include Just Jeans and Portmans.
The merger deal saw Myer issue 890.5 million shares to Solomon Lew’s Premier for the acquisition of the Apparel Brands business, while Premier also paid Myer $82 million in cash.
Following the deal, Myer shareholders (including Premier by way of its existing shareholding) hold 48.5% of issued capital in Myer, while Premier receives 51.5% of issued capital in Myer.
Premier Investments’ Solomon Lew also returned to Myer’s board as a director and remains chairman of Premier.
Share price could double
Assuming Myer’s executive chairwoman Olivia Wirth, the former chief executive of Qantas Loyalty, can successfully execute a turnaround strategy, Morgan Stanley believes the share price could reach $1.70 in a best-case scenario, if lower interest rates and tax cuts prompt shoppers to spend more.
While the stock rallied in August following the announced merger – hitting $1.26 late December, those gains have since unravelled, with the share price down 35% year to date.
The broker believes investors have simply underestimated the likelihood of the department store becoming a powerhouse as it morphs into a much larger retailer with an expanded portfolio of brands.
While Myer is in the early stages of its turnaround strategy to restore growth, Morgan Stanley’s Chenny Wang believes there’s a pathway for Myer’s share price to double, despite high execution risks.
Cost saving synergies
Given that there are 190 stores – across the five brands - in the same shopping centres as a Myer store, Morgan Stanley has also identified major cost saving synergies associated with moving the new brands into Myer stores.
Morgan Stanley reminded investors that store rationalisation projects – as witnessed at the Wesfarmer-owned Kmart - can deliver strong returns with limited sales leakage.
“Execution won’t be easy, but these key individuals reduce some risk,” said Morgan Stanley who noted the proven track record of the leadership team led by Wirth and Lew.
“We also like Myer’s refreshed strategy including the focus on higher-margin, differentiated, exclusive and private label brands.”
Meanwhile, Wirth has shared plans to expand Myer’s popular loyalty program to newly acquired chains that command higher margins than department stores.
The company also expects its heightened scale to afford it increased bargaining power to negotiate with suppliers, and sell more of its own brands across the network.
“Our combined business will be a leading omni-channel retail platform with pro forma historical annual sales of more than $4 billion in FY24 and a stronger balance sheet to fund future investment and growth," said Wirth.
Track record
Oscar Oberg, a portfolio manager at Wilson Asset Management expects Wirth’s experience running loyalty programs to increase penetration of Myer One - one of the highest-rated loyalty programs in the country - and potentially generate consistent top-line growth.
“If they execute their strategy, I actually think that the business can make close to $200 million in net profit in the next three to four years, and I think it’ll be higher than that over the longer term,” said Oberg.
Myer will release its half-year results on 19 March.
Myer previously announced that in the 22 weeks to 28 December, total sales were around $1.59 billion, down 0.8% on the prior corresponding period.
Meanwhile, operating gross profit at Myer was approximately $560 million, down $15 million on the prior corresponding period, while earnings were approximately $48 million, down around $16 million.
Myer has a market cap of $1.3 billion; the share price is up 1.2% in one year.
MYR shares are in a downtrend confirmed by multiple indicators. In the medium-term, the 5-day moving average is below the 50-day moving average.
Consensus in Myer is Moderate Buy.
This article does not constitute financial product advice. You should consider independent advice before making financial decisions.
