Myer cuts profit forecast after Topshop disaster

Poor conditions in June now means that Myer now expects profit to come in under $70 million. Photo: Jessica Shapiro
Poor conditions in June now means that Myer now expects profit to come in under $70 million. Photo: Jessica Shapiro

Myer chief executive Richard Umbers is vowing he will stick with the department store's five-year transformation strategy despite a massive writedown of key assets and wipe out of its expected full-year profits.

On Thursday, Myer said it would take a $45.6 million hit after writing off its 20 per cent stake in the failed Australian arm of UK fast-fashion label Topshop, as well as downgrading the value of its struggling sass & bide brand.

The two writedowns, plus a jump in operating costs, will largely negate a forecasted net profit between $66 million to $70 million before exceptional items for the financial year, the company said in an update to the stock exchange.

Thursday's announcement also included the news that Mr Umber's second-in-charge, Daniel Bracken, was leaving the business.

Mr Umbers, who took the reins from Bernie Brookes in 2015, said although the losses on the key brands were "disappointing", the overall "New Myer" strategy was on track.

"The whole market is operating in tough trading conditions. The department store sector has put out some pretty poor results over recent months," he said.

"I am a realist about where the numbers are but I am optimistic about New Myer, it's even more important than ever."

Experiences, not discounts  

Key to the New Myer strategy is pulling back from aggressive discounting and greater investment in "experiential" retailing.

"Historically what we have invested in is discounting to drive revenue but increasingly the deeper you have to discount ... we have incredibly sceptical consumers, it costs you more and more to do that," Mr Umbers said.

Digging in against aggressive discounting ... Myer chief Richard Umbers. Photo: Paul Jeffers

Digging in against aggressive discounting ... Myer chief Richard Umbers. Photo: Paul Jeffers

In a note to clients on Thursday, Citi analysts said Myer's altered discounting strategy had affected earnings in the second half of 2016-17, when many of its competitors were engaged in prolonged periods of promotion and clearance.

"Myer's downgrade ... does reflect a stall of momentum and deeper challenges in fashion, rather than broader consumer spend. The company has not been able to take sustained market share in the past six months," it said.

Since January, Myer has done several deals aimed at driving foot traffic and brand exposure, most recently becoming the naming partner of Katy Perry's 2018 Australian tour.

"We are still spending money but [finding] a more effective way of doing it," Mr Umbers said.

He said this strategy would better help attract and capture fickle millennial and online customers.

No reason has been given for the departure of deputy CEO Daniel Bracken. Photo: Wayne Taylor

No reason has been given for the departure of deputy CEO Daniel Bracken. Photo: Wayne Taylor

"The business is better future proofed if it has a stronger, 'stickier' relationship with these customers."

Catalyst for change

Analyst Brian Walker, chief executive of the Retail Doctor Group, said Thursday's announcements would likely lead to the closure of underperforming Myer stores.

Following the announcement, Myer's share price dropped by 9.82 per cent to 74 cents at the market close.

Mr Walker said it could be a good time for Premier Investments' Solomon Lew, who acquired a 10 per cent stake in Myer in a March share raid, to increase his stake.

"Change will happen. Whether it's change in ownership or change in them rethinking their model," Mr Walker said.

Mr Walker said Myer's value to investors lay in its loyalty program, Myer One, and a "great footprint and a great brand".

He said investment in experiential retail was a good strategy but didn't guarantee sales at the cash register.

"Australian consumers are more promiscuous than ever," he said. "H&M, Zara and Uniqlo account for the best part of $500 million in sales. That's come right out of the heart of Myer."

Topshop's 'halo' effect

Mr Umbers said the Topshop investment, while ultimately amounting to a loss of $6.8 million, had provided a "halo" effect to draw other brands to Myer.

"I don't think the logic of us investing in [Topshop] the first place was wrong," he said.

Topshop Australia collapsed in May, owing $35 million. Administrators have closed five of nine standalone stores, and all 17 Myer Topshop concessions have closed.

On its other ailing brand, sass & bide, Mr Umbers said new managing director Paula McKenzie, formerly head of Topshop Australia, would help steady the ship.

In light of Mr Bracken's departure, Mr Umbers said Karen Brewster, currently group general manager of apparel, would step up to become executive general manager of merchandise and product, while Damian Walton takes on an expanded role as executive general manger of merchandise planning.

Mr Umbers said a "tighter" approach to inventory control, including investing in a new, world-class software system, would lead to better targeted distribution of product.