Myer Holdings (MYR) is one of Australia’s largest department store groups, targeting a wide spectrum of consumers. The company has a national network of stores, retailing 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.

Improving consumer environment

MYR has been operating in an extraordinarily tough consumer environment in recent years, but conditions look to be easing.

In the first four months of 2013, the Westpac Consumer Confidence Index has risen to its highest level since December 2010. Since last October, consumer confidence has risen 11.5%.

It appears the RBA’s 2012 interest rate cuts are beginning to have a noticeable impact on confidence, leading to improved operating conditions for retailers like MYR.

1H13 results

Last month, MYR mentioned that its 1H13 net profit increased by 0.7% from the prior corresponding period to $87.9 million. An interim dividend of 10 cents was declared.

CEO, Mr. Bernie Brookes, said that, “we are pleased that the positive sales trend continued during the half, with the second quarter representing our third consecutive quarter of positive comparative store sales growth.

On a comparable store sales basis, 1H13 sales increased by 1.4% on the prior corresponding period to $1.7 billion.

The result was attributed to the good performance of its menswear, cosmetics, womenswear, fashion accessories, and childswear divisions.

Despite a challenging environment, MYR managed to grow same store sales by focusing on things it can control like improved customer service, new stores and refurbishments, and a better online offering.

The group’s investment in its own brands also appears to be paying off, with the positive customer reception helping to drive a 23 basis point increase in gross margin from 1H12.

On a one year forward P/E basis MYR is trading on a multiple of just 13.1x, representing a 13.5% discount to the median of its closest peers.

Outlook

MYR has provided three straight quarters of comparable store growth and we expect this trend to continue.

Sentiment towards retailing stocks is improving, with consumer confidence rising to multi-year highs thanks in part to the RBA’s rate cutting cycle.

MYR responded to the challenging retail environment by investing in its own brands. The 1H13 results showed solid demand for MYR’s brands, and we think this will translate into continued margin expansion.

The stock is still trading at relatively inexpensive multiples, offering good value around current prices.

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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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Myer Holdings (MYR) is among Australia’s largest department stores, retailing apparel, fashion, fragrances and cosmetics, homewares, electrical goods and general merchandise.

The company floated on the ASX in November 2009 and became one of the shares to sell in the months that followed amid a generally bearish outlook for retailers.

The group was hit hard on Monday after warning that its FY11 net profit was expected to be down 5% from FY10’s result.

Last November, MYR said that FY11 earnings were expected to grow 5% – 10% on-year.

MYR attributed the downgrade to a fragile consumer environment as a result of increased costs of living, the anticipated flood levy and food inflation.

MYR also offered a sombre assessment of first half sales, which it said were impacted by significant price deflation in a number of key product lines.

MYR tumbled 11.5% following its update, making it one of the worst performers in the Australian share market on the day.

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Myer Holdings (MYR) is among Australia’s largest department stores, retailing apparel, fashion, fragrances and cosmetics, homewares, electrical goods and general merchandise.

The company floated on the ASX in November last year and became one of the stocks to sell in the months that followed amid a generally bearish outlook for retailers.

Although MYR recovered from those lows, rising interest rates have again clouded the sales outlook meaning it will be one of the stocks to watch in coming months.

On 12 November, MYR reported a 1.5% drop in 1Q11 sales from a year ago to $706 million.  Like-for-like sales were down 1.7% on-year.

MYR attributed the fall in sales to price deflation for its flat screen TVs and other entertainment products.

However, MYR advised that sales for the remainder of 2011 will benefit from a number of growth initiatives such as new stores, refurbishments, and a total rebuild of the Myer Melbourne store.

The group also reaffirmed its previous FY11 guidance of a 5% – 10% growth in net profit to $177 million – $186 million.

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