Myer became one of the more notorious private equity float disasters for investors — and there is quite a catalogue to choose from. The department store shares were sold at $4.10 in the 2009 float, closed at $3.75 on their first day of trading and has never traded at or above the float price since.

Figure 1. MYR share price chart
Source: Thomson Reuters Eikon
The journey for Myer was one long litany of disappointments with falling profitability, excessive dividend payouts followed by dividend cuts, failed recovery strategies, and then a dilutive equity raising at 94c in September last year to recapitalise the group. That is until recently…
Under new management led by CEO Richard Umbers, Myer’s sales performance is starting to improve and the company is now on our watch list for the first time in its seven years as a listed stock.
Many people believed the arrival of large foreign retailers would make life harder for incumbent department stores by increasing competitive pressures, but still expected the quality of management would be the primary reason a traditional department store would perform well or fade away. This view is now being borne out. With the change to new CEO Umbers in March last year, followed by the launch of the ‘‘New Myer’’ strategy in September, the stock deserves further consideration by any serious investor.
Three important metrics when researching any retail stock including Myer are:
1. Total sales, an indicator of the overall health of the company.
2. Comparable store sales — a measure of how the group is operating on a store by store basis. This excludes the boost a group may receive in opening new stores.
3. Sales per square metre, a key efficiency measure in retailing.
One central problem used to be Myer’s confused approach to its customers.
The post-private equity Myer was never clear about who its target customers were and haphazardly aimed for a broad mid-market approach that ended up being perceived as a down-market offer by some shoppers due to poor service and often messy, disorganised stores.
Under new management Myer decided to go up-market with a more premium offer. This brings its own risks but at least Myer has now segmented its customer base, a successful strategy we have seen at many companies and not only in retail.
The company delivered 7.1 per cent comparable store sales growth for the first half of 2016 — drawing investor attention to Myer’s 12 NSW and Victorian flagship and premium stores. This was higher than the 3.3 per cent comparable store sales growth across the whole network. These stores get priority for implementation of the New Myer initiatives so they will grow in proportion as Myer deweights its less valuable small and regional stores. Last week, for example, Myer announced the closure of its Wollongong and Orange stores and management has signalled a bias to allocating less capital to the other small stores.
At a current share price of about $1.10, Myer is trading in line with value of about $1.15. As long as consumer sentiment holds up Myer’s sales are likely to grow solidly in coming periods due to these key factors: the introduction of more desirable third-party brands; having less unproductive trading space; and introducing more focused capital expenditure.
While the long summer will dampen fourth-quarter results, the trend improvement is more material and directors are clearly more confident because they restored the interim dividend and upgraded the lower end of their 2016 earnings guidance range. As an enterprise Myer has basically become less risky. The growth in sales per square metre is telling and underlines the benefits of a mix shift towards desirable brands with better merchandising and service in premium and flagship stores. After several quarters of sales growth and improving sales productivity, it is increasingly clear the merchandise changes should drive ongoing sales growth in coming periods.
The better sales performance is not yet visible in margins and earnings, as Myer is investing fairly heavily in refurbishments at the premium stores. There is also margin pressure from the Australian dollar’s depreciation. Despite better management Myer remains a consumer cyclical exposed to the vagaries of the economy and consumer sentiment, so it’s still more of a cyclical trade than a long-term hold.
But for the first time in seven years, we do now see Myer as investible, so it’s on the watchlist our model portfolio (managed within StocksInValue)  if a market correction gives us an entry closer to $1.00.
 
Written by David Walker, Senior Analyst. The following article appeared in the Wealth section of The Australian, 31 May 2016.