Myer and the King of Retail

Myer MYR

Myer, Myer, Myer. What are we going to do with you?

Judging by Myer Holdings Ltd’s [ASX:MYR] recent revenue slump, it’s not so much a question of what we are going to do with Myer as it is the fact that we are done with Myer.

Last week, Myer chief executive Richard Umbers announced to the market that same-store sales fell 2.1% in the first quarter of this financial year. Two years into Myer’s much hyped ‘turnaround’ strategy, things aren’t looking good.

But Umbers only had more bad news for the market.

The CEO pointed out that sales per square metre would now improve by 10% to 2020, and not the 20% originally forecast. He also noted that sales and earnings growth targets were downgraded.

All of these falling numbers raised the ire of Aussie rag trade legend Solomon Lew.

Lew, who owns 10.8% of Myer shares through Premier Investments Ltd [ASX:PMV], is the one who pushed for the first-quarter figures to be released at the annual general meeting. Suggesting during the meeting that Myer get rid of three directors to ‘stop the rot’.

The Aussie market didn’t like the data, with Myer shares falling 4.6%. But the joke is really on the early investors. The Myer share price is now worth a fifth of the value compared to its initial public offering price of $4.10 in November 2009.

Lew bought into Myer earlier in the year, sinking $101 million to claim a stake in the company. So it’s no surprise to learn that he is keen to protect his investment.

The main criticism Lew has of the top Myer boffins is that they don’t have enough ‘skin’ in the game. Myer directors have taken home $6.2 million in fees, yet only own $800,000 worth of shares. In other words, Myer directors get paid a handsome fee whether Myer makes money or not.

On the surface, Lew’s argument is that shareholder value needs to be protected, and he thinks bringing a new board in will do just that.

Lew’s attempt to be the Robin Hood to Myer shareholders is admirable. However, at the end of the day, Lew only cares about his stake in Myer. Not yours.

In fact, outgoing Myer chairman Paul McClintock has even suggested that Lew is trying to wage a war on Myer shareholders so Lew can take control of the company on the cheap.

Not only that, Lew was pushing to have two Premier Investments directors appointed to the Myer board. A quick investigation into that quickly put the idea to bed. The Myer board felt there was a conflict of interest, as Premier Investments (and Lew’s associated businesses) is Myer’s largest domestic supplier, selling about $200 million annually.

Could it be nostalgia? Lew’s relationship with the company dates back to the 1960s, when he first started supplying merchandise to the company.

Is Lew really looking to buy out the department store on the cheap? After all, Premier Investments is currently worth three and a half times more than Myer, with a market cap of $2.1 billion compared to Myer’s $612 million.

I have no doubt that Lew is a shrewd businessman. You don’t dominate Australian retail for decades without knowing a thing or two about the Aussie retail market.

But perhaps Lew’s days of having the Midas touch with the retail industry are over, and squabbling with Myer is Lew’s last attempt to protect his very valuable supply chain to possibly one of his largest buyers. We can’t be certain Myer is one of his largest buyers, as Lew is notoriously private, and runs several privately-listed businesses to protect his interests.

My guess is that the retail environment changed at a quicker pace in the past 10 years than in the 20 years before that. Myer has struggled to adapt and remain relevant with products and integrating digital sales into the business. It took them years to start it at all. Even now, it’s an ordinary end-user experience.

Then there is Lew’s Premier Investments. The only reason PMV is making money is because someone told Lew to snap up Smiggle and Peter Alexander when they came on the market. These two purchases enabled Lew to remain king of Aussie retail by flogging expensive sleepwear and stationary to tweens.

The other brands in the Premier stable — Jacquie E, Jay Jays, Portmans, Just Jeans and Dotti — are mature brands that have fallen out of favour with consumers. During a result meeting, the company announced that sales were down 8.6% at Portmans, 3.6% at Dotti, and 6.2% at Jacquie E for the 2017 financial year. Only Just Jeans rose by 1.5%.

The lack of love for these brands comes down largely to consumer choice. Thanks to the internet and international companies setting up shop in Australia, older brands just don’t interest consumers as much.

Given that Lew didn’t have the foresight to ditch these brands a decade ago when they were at their peak, I find it impossible to believe that Lew will be the knight in shining armour for Myer’s retail woes. If anything, his foot-stomping is mostly about protecting his sizeable investment in the department store. And ensuring his other businesses don’t lose customers.

What this does mean for Myer shareholders, though, is that things are probably going to get worse before they get better.

Kind regards,

Shae Russell,
Editor, Markets & Money

PS: One argument against investing in Myer is the arrival of Amazon in Australia. Some retail analysts reckon that Amazon will come to Australia and crush the local retail market. I don’t think that will be the case. But Amazon will have an impact on the Aussie market. As highlighted in this report, Amazon is coming to shake up Australia industry for the better.

Shae Russell

Shae Russell

Drawing on her extensive experience, Shae is an editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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