Department store Myer (ASX: MYR) has shown promising signs in the first half of FY20, but its achievements were overshadowed by the exit of major brands and a disappointing performance in womenswear.
Myer chief executive John King says a 3.8 per cent reduction in sales to $1.6 billion can be explained by several factors including a continued focus on profitability, the departure of Apple and the Country Road Group brands, and issues with the womenswear department
"Management acknowledge the underperformance in the Womenswear category and expect improvements made by the new leadership team to flow through later in the calendar year," he says.
The company managed to rein in costs by 2.6 per cent, while same-store growth stood at 0.4 per cent excluding major brand exits.
Net profit after tax (NPAT) was fairly stable, but statutory profit plunged 26.9 per cent pre-AASB 16 to $28.1 million.
With new accounting standards in place the profit was down further at $24.4 million.
But there was plenty of silver lining for the legacy retailer which is still grappling with a fast-changing retail environment. Online sales growth continued to be above the 25 per cent mark, reaching $168.2 million.
Online now represents 10.5 per cent of total sales for the company.
"Pleasingly, there was continued strong growth in online sales, despite the exit of several low margin brands," says King.
"During the period the online range was expanded, in particular in concessions, and checkout and Click & Collect were improved which combined to underpin the continued growth.
"The improved operating gross profit margin and continued disciplined cost management combined to offset the reduction in total sales."
King says the reduction in the cost of doing business (CODB) to $516.1 million was part of a "further simplification of the business", including enhanced in-store staffing model, reduced store occupancy and efficiencies which led to fewer management and administration roles, mostly in Myer's support office.
"Further progress was made to strengthen the balance sheet. Net cash at the end of the period increased by $65 million to $103 million compared to 1H19, reflecting continued disciplined cash management," the executive adds.
"Capital expenditure was $22 million in the half, down $5 million compared to 1H19, reflecting the heightened focus on return hurdles. There continues to be headroom in all covenants and the dividend remains suspended.
"We continue to work with our landlords via a portfolio partnership approach to reduce our footprint and refurbish stores to transform the customer experience, whilst delivering material cost savings."
Myer closed its Hornsby, Sydney store in January, and overall the group's clearance floor concept has closed with the space returning to normal trading or converted into dark floors.
Refurbishments have commenced at the Cairns and Karrinyup, Perth stores, both underpinned by significant landlord contributions.
Elsewhere, a major upgrade is set to take place this half in Myer's Sydney City ground floor and atrium and work will also commence at our Belconnen store to reduce space, followed by a refurbishment.
Upgrades are also planned at our Albury, NSW and Ballarat, VIC stores.
"Significant retail experience amongst the leadership team combined with prudent fiscal management has resulted in a solid result as well as a strengthened balance sheet despite a significant deterioration in the operating environment during the peak trading period," says King.
King notes that while management has demonstrated discipline in tough trading conditions and he is encouraged by the progress to date, there is still a considerable amount of work to be done.
"The supply chain impact of Coronavirus is currently being managed by our teams in Hong Kong and Shanghai. The team are focused on mitigating the impact of delays to the planned delivery of merchandise," he says.
"Myer anticipates the challenging macro environment will continue in the second half, and the ongoing impact of the Coronavirus on store traffic remains uncertain. The pace of change will therefore be managed in the best interests of customers and shareholders.
"We have a clear plan to address the underperformance in Womenswear with new management and a strengthened design team for Myer Exclusive Brands, with improvements not anticipated until FY21."
The CEO highlights "numerous opportunities" to improve productivity and further reduce costs, especially around areas of store occupancy and factory-to-customer fulfilment for both online and offline stores.
"We have commenced refinancing discussions with our banking syndicate and will update the market once completed," he adds.
Myer shares have outpaced the ASX's rebound in early trading today, up 2.9 per cent at $0.355.
This is however still half their value in April last year and just 28 per cent of their three-year high above the $1.20 mark.
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