Can Sass & Bide give Myer the sales growth it needs? Bartholomeusz

Coming into Christmas, Bernie Brookes would have hoped he’d seen the worst of the abrupt freeze in consumer spending that followed the Reserve Bank’s November rate rise and would have still been optimistic about Myer meeting its profit guidance as the pre-Christmas trading stabilised. Poor weather, floods, cyclones and price deflation, however, have overwhelmed the department store group.

Myer now expects first half earnings of between $106 million and $109 million, compared with $155 million for the same period of last year, and has revised its full-year guidance of growth of five to 10% down by as much as 5% to around $160 million, compared with last year’s $169 million.

With sales for the first half down 3.54% – 5.19% on a like-for like basis – the hope that the sales decline could be offset by a pick-up in post-Christmas sales and cost measures was dashed by what Brookes described as a progressive decline in sales during the critical stocktake sale period. Foot traffic in the stores was down a staggering 7%.

The market’s response to the downgrade was quite savage, given that it has been obvious for some time that all the discretionary retailers are being heavily impacted by a confluence of adverse events and influences. Myer’s experience isn’t an isolated one and the market immediately marked down its rival, David Jones, as it digested the broader implications of the Myer announcement.

Target’s recent sales results, for instance, were down 3.1% for the half (3.3% like-for-like) and 4.2% in the second quarter, and Big W reported a 2.8% fall in first half sales, while Premier Investments chairman, Solomon Lew has criticised the November rate increase for having a clear and demonstrably negative impact on already fragile consumer confidence.

In the near-term there’s not much relief in sight for the sector. Consumers have become extremely defensive and the prospect of further rate rises later this year casts a further shadow over the prospects for retailers. The floods and volatile weather won’t help, nor will the strength of the Australian dollar or the continuing increases in energy, petrol, health care and education costs.

Longer-term Myer does have some reason to believe it will regain some momentum. The critical Bourke Street redevelopment has been completed and the group has a number of new stores either open or in the pipeline, as well as a number of refurbished stores. It is expanding its own online offer and, with global sourcing offices in Shanghai and Hong Kong, is looking to launch an offshore online retailing business.

With the confirmation that Myer has acquired a 65% interest in fashion brand Sass & Bide – previously an anchor brand for rival David Jones – a new and interesting growth strategy has emerged. Brookes said today that Sass & Bride had grown its sales by more than 50% over the past two years, achieved margins above 20% and would produce a return on investment of more than twice Myer’s weighted average cost of capital.

More significant than the short investment metrics, however, is the potential for Myer to leverage the growth in the speciality retailer by stocking the brand in more of its stores, supporting the growth of Sass & Bide’s retail network, expanding its international distribution network and perhaps its product range.

That gives Myer a prospective growth channel outside its core department store business, as well as access to entrepreneurial management and speciality store expertise. Brookes mused aloud today about the potential to create speciality store networks for Myer’s proprietary brands. It is also conceivable that Myer could acquire more established speciality retailers if the Sass & Bide experiment is successful.

The Sass & Bide acquisition, plus the recent defections of other high-profile brands from David Jones in order to increase their exposure and volumes through Myer’s far larger store network, may also help Myer in the continuing battle for exclusive brands between the two big department store operators. The loss of Sass & Bide is damaging for David Jones.

The key criticism of Myer before today hadn’t been about its profitability – today was its first slip in earnings since Brookes became chief executive when Myer was acquired by private equity in 2006 – but the lack of sales growth.

An aggressive speciality store strategy built around the brands it has itself created or controls, and those it might acquire, might eventually add the tinge of growth that the market has been seeking, assuming that the tide of adverse events beyond retailers’ control eventually turns.

This article first appeared on Business Spectator.