Myer Holdings (ASX:MYR) is one of Australia’s largest department store groups targeting a wide spectrum of consumers.
Myer has a national network of stores in Australia. It retails designer, national, and international fashion and apparel for men, women and children.
MYR focuses on its retail presence and execution, and also operates a consumer loyalty program.
A cloudy macroeconomic picture has been a major thorn for MYR and its retail peers in recent times.
However, the RBA’s recent rate cut could be the first sign of a near-term turnaround in the company’s fortunes.
Although MYR’s first quarter sales were weak, we see a pickup in momentum heading into 2012, which makes the stock an attractive proposition around current levels.
Confidence is key
MYR’s troubles have stemmed largely from concerns about the Australian economy, specifically the deterioration in consumer sentiment.
Consumer sentiment has remained weak for much of the past year amid global market volatility and the RBA’s hawkish stance on monetary policy.
This has prompted consumers to save more and cut back on discretionary spending, which has hit the sales of retailers such as MYR and David Jones.
However, things have improved in recent weeks, particularly with the RBA’s recent dovishness translating into an interest rate cut this month.
Consumer sentiment shot up 6.3% this month in response to the rate cut as well as the potential for further easing.
When combined with the Aussie dollar’s recent decline, the economic conditions are ripe for a near-term pickup in domestic consumer spending. This should come as a welcome relief for MYR’s sales heading into 2012.
Deflating trading conditions
Yesterday MYR reported a 3.5% fall in 1Q12 sales from a year earlier to $$681.million. On a like-for-like basis, sales were down 5.1%.
The group experienced a tough trading environment during the quarter, but nevertheless said sales were tracking expectations. It also reaffirmed its full year forecast for flat sales and a 10% fall in net profit.
This came as a relief to the market, which had feared a worse result given the recent global economic turbulence.
The sales result came on the back of a tough FY11, in which net profit fell 3.6% to $162.7 million. Sales were also down for the year amid challenging retail conditions.
A final dividend of 11.5 cents was declared, bringing the full year dividend to 22.5 cents. Maintaining this dividend in FY12 would result in a robust yield ~9%, but even if the group cuts its dividend by 10% (20.25 cents), it would still deliver a healthy yield of ~8%.
Just how valuable?
Despite MYR’s weak 1Q12, we expect an improvement in sales heading into Christmas as consumers take advantage of the recent rate cut.
Unless Europe’s debt crisis intensifies, the rate cut may also prompt consumers to release pent up demand in 2012, which we see as underpinning a sales recovery for MYR.
Heading into FY13, we see a rebound in both earnings and sales for MYR as the Australian economy gathers steam due to the mining boom.
Myer is currently trading at a deep discount to its rivals, given the poor earnings expectation for FY12. The group’s current P/E of just 8.9x represents a ~30% discount to its industry average.
However we believe the discount is too deep given the company’s relatively stronger leverage to improving consumer sentiment.
Adjusting the discount to 15%, and using a blended EPS spread over FY12, FY13 and FY14, our fundamental-based price target for MYR is $2.77, which represents good value around current levels.
Outlook
Aussie retailers have been out of favour for a while due to cyclical issues (tough economy) and more serious structural problems (strong AUD and online competition).
Whilst we are cautious on retailers as whole due to those structural issues, there is finally some value in the sector given the potential for an improvement in trading conditions.
The RBA’s recent rate cut could prompt consumers to release pent-up demand, which we believe will benefit retailers with strong operational leverage such as MYR.
Although the group’s first quarter sales were weak, we see a pickup in momentum heading into 2012.
Adjusting MYR’s deep discount to its peers, we have a price target of $2.77, which offers decent value at the current share price, particularly when factoring the healthy dividend yield.
If MYR keeps picking up momentum it will be a stock to watch right into the new year.
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