Myer Earnings: Cyclical Slowdown Ahead After Strong Fiscal 2023

We maintain our AUD 0.75 per share fair value estimate for no-moat Myer MYR. Sales of AUD 3.4 billion had already been earmarked in August 2023, and adjusted net income of AUD 71 million was in the middle of the guidance range, up 18% on last year and in line with our estimate. The board declared a final dividend of AUD 1 cent per share, bringing total fiscal 2023 dividends to AUD 9 cents, including AUD 4 cent interim and AUD 4 cent special dividend. At current prices, Myer screens as undervalued. We think the market is more concerned about the uncertain near-term trading outlook, given the recent earnings volatility.

Granted, fiscal 2024 is shaping up to be a challenging year for Myer, and we forecast sales to fall by 5%. The first six weeks of the new financial year are holding up reasonably well, with comparable sales declining 2%. However, at close to 60% of sales, Myer is heavily exposed to fashion retailing, and we expect apparel to be one of the more vulnerable retailing categories to the cyclical slowdown. We forecast falling sales and wage bill pressure to drag Myer’s fiscal 2024 underlying pretax margin to around 2%, down some 80 basis points from a cyclical high of almost 3% in fiscal 2023. We maintain our fiscal 2024 net profit after tax forecast of AUD 48 million, or AUD 6 cents per share, a 32% decline on fiscal 2023.

Nevertheless, we see some positives on the horizon for Myer. Its new national distribution center eliminates the costly exercise of fulfilling online orders in-store. Once fully ramped up, we estimate this to deliver efficiency gains of up to AUD 15 million from fiscal 2027. Improving shrinkage, or theft losses, could further boost pretax margins materially. Shrinkage has increased to almost 2% of wholesale sales, or AUD 47 million, in fiscal 2023, from a little under 1% in fiscal 2019.