Did anyone really expect that Myer would be immune from the pain that the discretionary retail sector is enduring? Those optimists received a sobering reality check on Tuesday when the department store group provided a taste of how it had fared in the half-year to July 29.
It wasn’t pretty and does not augur well for what’s coming down the pike in the current six months to January 2024.
Chief executive John King will leave the position next year.Credit: Getty Images
Anyone who thought Myer’s second half would be strong must occupy the same parallel universe of those who believe the current board will decide who will replace John King when (as recently announced) he will depart the top job next year.
They won’t. Myer’s largest shareholder with a 26 per cent stake, Solomon Lew, is now this company’s kingmaker and, in this case, King replacer.
And this month, Lew’s window of opportunity opens up enabling him to hoover up another 3 per cent of Myer shares via the Corporations Act creep provisions. So, there is every chance he will soon have closer to 29 per cent.
The Myer board would understand this puts Lew in an unassailable position to exercise de facto governance, and historically he has shown his desire to use whatever power he has.
No retail executive who values their career will take the Myer chief executive job if Lew has not signed it off. That would be career suicide.
The obvious candidate is the former chief executive of David Jones and more recently the boss of Lew’s Premier Retail, Mark McInnes. The role certainly looks tailor-made for McInnes, who has been restricted by a non-compete clause that runs out in January 2024.
The only other market chat around King’s replacement has been Bunnings boss Mike Schneider.
Under the leadership of King, Myer has managed to keep sales growth during the second half in positive territory – albeit at a 0.4 per cent crawl. It would be unsurprising if sales over the past couple of months of this second half (June and July) were in negative territory, since King had previously said sales were growing at 16 per cent in February.
Solomon Lew – Myer kingmaker.Credit: Fairfax Media
No retail executive who values their career will take the Myer chief executive job if Lew has not signed it off.
But a closer inspection of the numbers is even more alarming. Myer is now projecting net profit for the half to come in at between $4 million and $8 million – so let’s call it $6 million. But in the same period last year, Myer inked $28 million net profit in the second-half.
That is a comprehensive collapse.
And the update notes there will be one-off costs that are not included in the $6 million, and these could tip Myer into a loss for the half.
The 14 per cent dive in the share price on Tuesday reflects the size of Myer’s earnings problem.
Tuesday’s Myer update spoke of the prevailing economic headwinds and its plan to keep a lid on costs and inventory, and manage cash judiciously.
The share price surged in March to $1.14 but has fallen about 45 per cent since then.
A strong first half result in 2023 will enable Myer to boast a full-year profit increase of about 18 per cent. But in valuation terms, companies are judged on future rather than past earnings.
And in a retail environment that is now soggy at best, a department store retailer such as Myer has nowhere to hide. If anything, it is the canary in the coal mine of the discretionary retail sector.
That’s because it sells a broad range of merchandise that is pitched at the vulnerable mid-range market rather than the value end (such as Kmart and Big W), or very high end, which is largely immune from the damaging effects of high interest rates and inflation.
King will be hoping that the economy and Myer’s financial fortunes will improve between now and when he departs the job at the back end of 2024, enabling him to retain the mantle of the department store’s saviour. He has given himself a runway of about 18 months before he departs.
Shareholders should be bracing themselves for whatever King says about current trading conditions when the full year 2023 results are announced in September.
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