Myer and the King of Retail

Myer, Myer, Myer. What are we going to do with you?

Judging by Myer’s [ASX:MYR] recent falling revenues, it’s not what we are going to ‘do’ with Myer, rather that we are ‘done’ with Myer.

Last week, Myer’s chief executive Richard Umbers announced to the market that same-store sales fell 2.1% in the first quarter of the financial year. Two years into Myer’s much overhyped ‘turnaround’ strategy, and things aren’t looking good.

Umbers only had more bad news for the market.

The chief pointed out that sales per square per metre would now improve by 10%, by 2020, rather than the 20% originally forecast. Oh, and that sales and earnings growth targets were mysteriously dropped.

All of these falling numbers raised the ire of Aussie rag trade legend, Solomon Lew.

Lew, who owns 10.8% of Myer shares through Premier Investments [ASX:PMV], is the one who pushed for the first quarter figures to be released at the annual general meeting. He suggested during the meeting that Myer get rid of three directors to ‘stop the rot’.

The Aussie market didn’t like the data, with Myer shares falling 4.6%. But the jokes really on the early investors. The departments store share price is now worth one fifth of value compared to initial public offering price of $4.10 in November 2009.

Solly Lew bought into Myer earlier in the year, sinking $101 million to claim his stake in the company. So it’s no surprise that he is keen to protect his investment.

The main criticism Lew has of the top Myer boffins, is that they don’t have enough ‘skin’ in the game. That is, Myer directors have taken home $6.2 million in fees, yet only own $800,000 worth of shares. In other words, the Myer directors get paid a handsome fee whether Myer makes money or not.

On the surface, Lew’s argument is that shareholder value needs to be protected, and he thinks brining a new board in will do that.

Lew’s attempt to be the Robin Hood to Myer’s shareholders is admirable. However, at the end of the day good old Solly Lew only cares about his stake in Myer. Not yours. 

In fact, outgoing Myer chairman Paul McClintock has even suggested that Lew is trying to wage a war on Myer shares so Lew can take control of the company on the cheap.

Not only that, Lew was pushing to have two Premier Investments directors appointed to the Myer board. A quick bit of investigations quickly that idea to bed, though. The Myer board felt there was a conflict of interest as Premier Investment’s and Lew’s associated businesses is Myer’s largest domestic supplier, selling about $200 million annually. Whoops.

Could it be nostalgia? Lew’s relationship with the company dates back to the 1960s, when Lew first started supplying merchandise to the company.

Is rag trader king Lew really looking to buy out the department store on the cheap? After all, retail business Premier Investment is currently three and a half times the value of Myer, with each having a market capitalism of $2.1 billion to $612 million respectively.

I have no doubt that Lew is shrewd businessman. You don’t dominate Australian retail for decades without knowing a thing or two about the Aussie retail market.

But perhaps Lew’s days of having the Midas touch with the retail industry are over, and squabbling with Myer is Lew’s last attempt to protect his very valuable supply chain to possibly one of his largest buyers. We can’t be certain Myer is one of his largest buyers though, as the Lew is notoriously private, and runs several privately listed businesses to protect his interests.

My guess is, the retail environment changed at a quicker pace in the past 10 years than the the 20 before that. Myer has struggled to adapt and remain relevant, with products as well as how to integrate digital sales into the business. It took them years to do it at all. And even now it’s an ordinary end user experience.

Then there’s Lew’s Premier Investments. The only reason PMV is making money is because someone told Lew to snap up Smiggle and Peter Alexander when they came on the market. These two purchases enabled Lew to remain king of Aussie retail by flogging expensive sleepwear and shimmery stationary to tweens.

The other brands in the Premier sable, Jacquie E, Jay Jays, Portmans, Just Jeans and Dotti, are mature brands that have fallen out of favour with consumers. During a result meeting the company announced that sales at Portmans fell 8.6%, Dotti fell 3.6%, and Jacquie E dropped 6.2% for the 2017 financial year. Only Just Jeans rose, at 1.5%.

The lack of love for these brands largely comes down largely to consumer choice. Thanks to the internet and international companies setting up shop here, older brands such Lew’s just don’t interest us anymore.

Given that Lew didn’t have the foresight to ditch these brands a decade ago when they were at their peak, I find it impossible to believe that Lew will be the knight in shining armour for Myer’s retail woes. If anything, his foot stomping is mostly about protecting his own sizeable investment into the department store. And ensuring his other businesses don’t lose a customer.

What this does mean for Myer shareholders though, is that things are going to get worse before they get better. Settle in folks.

Kind regards,

Shae Russell,
Contributor, Money Morning

PS: One argument against investing Myer is the arrival of Amazon in Australia. Some retail analysts reckon that Amazon will come to Australia and crush the local retail market. I don’t think that will be the case. Make no mistake though, Amazon will have an impact on the Aussie market. As highlighted in a new special report to be published today, Amazon is coming to shake up Australia industry for the better. Watch your inbox later today for more.

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia