OK, I’ve been patiently waiting for someone — journalist, retail analyst, commentator, competitor or anyone to take a good hard look at Myer’s performance over the past few years under TPG. Sadly, we are still seeing coverage that is largely focused on the brand’s profitability (or Jennifer Hawkins — OMG as the Herald Sun asked this weekend, why didn’t she go the grand final?) with little critical focus on the overall performance of the nation’s largest department store. Yes, huge profit growth makes for strong media interest, but scratch the surface and the full story is there to be told (the facts are not hard to find). While the brand’s profitability is nothing short of stunning, I fear that the market is being sucked into a private equity vortex that is being whipped up by bull-market driven float frenzy (yes, greed seems to be back).
The fact is, Myer’s sales have pretty much gone nowhere in the 40-odd months since Coles Myer sold the brand to TPG. In fact, when inflation is taken into account (3.5% in 06, 2.3% in 07, 4.3% in 08 and lower in 09), total compound sales growth is well into negative territory. Add to that the fact that Myer has increased its store numbers by 10% from 59 to 65 under TPG, and the story is even worse for Myer. New stores have been opened at Eastgardens in Sydney, North Lakes in Brisbane, Werribee and Forest Hill in Victoria and Colonnades and Elizabeth in Adelaide, while TPG was forced to close and gift Burwood in Sydney to David Jones as part of a complicated (and ruthless) leasing deal with Westfield.
In FY05, the last full year under Coles Myer, Myer reported sales of $3.096 billion. In FY06, Myer’s sales were $1.713 billion for the first half (up 2.8%, including Q2 sales of $1.050 billion, up 3%) and $674 million in Q3, up 7.9%. The brand was sold in Q4 FY06, and neither Coles Myer nor the new owners fully reported sales for the quarter. But Myer had strong sales momentum during FY06, a period when no one was really paying attention because the brand was in the process of being sold. Coles Myer didn’t care, and TPG was not interested in the final sales performance under ex-MD Dawn Robertson. It should be noted that Myer’s reported sales for FY05 and FY06 did not include sales from the troublesome Megamart, which had been stripped out and was eventually sold to Gerry Harvey.
If the average sales increase over the first nine months of FY06 is applied to the last quarter (let’s say roughly 4%, bearing in mind that sales momentum was increasing at Myer during FY06), then Myer could have easily delivered a sales increase of between 4% and 5% for the year. That would have resulted in sales for FY06 of between $3.2 billion and $3.3 billion. Compare that to TPG’s first full year ($3.289 billion in FY07, $3.32 billion in FY08 and $3.26 billion in FY09), and the picture is starting to look a little cloudy for TPG. One would assume that increasing the store portfolio by 10% alone would add roughly 10% to the total sales figure, but the fact is, total sales are below where they were when TPG bought the business. Sure, there has been the recession, but that has been countered somewhat by the stimulus (as acknowledged by TPG’s Bernie Brookes). And sales figures for TPG’s first year in FY07 were inflated by their $100 million “historic” clearance sale.
Like for like comparison? TPG would say not. In fact, it has been less than complimentary of Myer under Dawn Robertson. While Robertson’s time at Myer has largely been written off, she played a significant part in getting TPG to where they are today. Many forget that Myer was a total basket case before her arrival. And yes, she may have been overpaid, American and too focused on her profile, but the fact is, much of what she did during her time has been embraced by TPG.
Robertson created Myer One, and got sales through the program to roughly 45% when the business was sold (TPG has lifted that figure into the mid -60s). Robertson created the “mystore Myer” advertising campaign that TPG still uses; she introduced private brands Basque (which was already the biggest selling women’s brand by volume when TPG took over) as well as Blaq in menswear and a host of other brands, which TPG now pushes very strongly in its marketing. She developed the so-called brand matrix (designer, national and private), which TPG hawks as its own. She renovated Chadstone and several other stores (TPG largely uses the renovation model when updating stores) and Robertson’s team drew up the plans for the Myer Melbourne renovation, which TPG has largely embraced. She commissioned ‘mymerch’, the new merchandise system, which was virtually complete when the brand was sold, and which TPG adopted virtually unchanged. The current Myer marketing schedule (i.e. sale events and even their names) is virtually unchanged from Robertson’s program, including the overall level of promotion, despite what TPG says. And she even introduced Jennifer Hawkins to Myer, with her first post-Miss Universe modelling job at a Myer season launch event in 2006.
While Robertson did not deliver strong profit growth, it should be acknowledged that most of TPG’s profit growth has come from staff reduction or areas that were outside of her control. When Myer was sold, it went to TPG with 22,000 people. TPG’s latest results presentation listed a staff of 16,000. Of the cuts, 5000 people have come from the shop floor, with an average salary of perhaps $30k, while 1000 have come from head office, with an average salary at about $60,000-$70,000 (do the maths). Apart from staff numbers, TPG has delivered most of its profit increase from good improvements in supply chain, which was a Coles Myer function and generally outside of the brand’s control.
Sustainable profit growth comes from sustainable sales growth. Many CEOs (including, ironically, former Coles Myer CEO John Fletcher) have acknowledged that you cannot cost-cut your way to greatness. After 40 months of aggressive cost reduction, it is clear that TPG is running out of things to cut at Myer, and is perhaps a reason for the rushed float. TPG has talked up growth prospects from the 15 new stores it plans to open in the next four years, but it has not generated any sales growth from its six new stores to date.
The really big question for anyone thinking of dropping their money into the Myer float — and one that needs to be asked publicly — is whether Myer can deliver any sustainable sales growth. The answer today is a clear no. TPG has previously floated two department stores, Debenhams, in the UK, and Neiman Marcus, in the US, and both were disasters when they hit the market, with Neiman Marcus losing almost 70% of its value. The stories are eerily similar: chronically underperforming department stores that were massaged to deliver huge profits on limited or negative sales growth, and then floated with much fanfare. That Bernie Brookes, who it has been reported stands to walk away with up to $70 million after a successful float, believes Myer can list at a premium to David Jones, which has delivered years of sustainable sales and profit growth, shows just how little scrutiny there has been of TPG’s performance.