The dead flat sales growth and falling profit reported by Myer this morning, over what should have been a strong half-year, underlines the structural challenge facing our two big department stores — and why they are being forced into an uncomfortable merger.

Myer shares fell sharply this morning, dropping 5% to $2.53, on news total sales rose just 0.3% to $1.7 billion in over the six months to late January — despite the huge Christmas stocktake sales. Operating profit margin fell 21 basis points to 41% and after-tax profit dropped 8% to $81 million.

The soft result comes despite stronger-than-expected ABS retail trade figures over the past few months, and contrasts poorly with the 3.9% sales growth to $1.04 billion reported over the same half-year by rival David Jones. DJs maintained its profit margins at 39% but after-tax profit fell 5% to $70 million.

DJs shares, which held up yesterday, were also down 2% this morning, showing there is plenty of investor scepticism about the outlook.

Analysts on the Myer dial-in — which was continuing as we write — were searching for explanations, complaining “this should have been a better half”.

Chief Bernie Brookes said after a soft start to Christmas in November and the beginning of December, Myer had its best stocktake sale in 10 years. Nevertheless, Myer’s five-year run of gross profit growth has come to an end.

While the imperative to merger is only getting clearer, it is getting harder to come to terms as David Jones’ negotiating position strengthens while Myer has little room to improve its offer.

Retail consultant Michael Baker says given the background recovery in consumer spending, the question raised by this morning’s result is “if things are really improving so much, is this the best you can do?”.

Both DJs and Myer are suffering a continuing trend of pressure on margins. “Either way you look at it,” said Baker, “they’re still getting squeezed and still need to grow the top line.”

The performance data (source: company reports, Baker Consulting) shows that despite a recovery of sorts over the past two years, both Myer and DJs have lost comparable or same-store sales over the past five years — cumulatively, they are down 5% and 1.3% respectively:

While both groups are struggling, Baker says DJs is in a relatively better position than Myer. “DJs feel that they have a better growth trajectory, they have a better strategy and a better position in the market as a house of brands for upscale brands,” he said.

“That’s a strong position. They have a lot fewer stores than Myer as well, so they have fewer in absolute numbers that are underperforming.”

Peter Fray

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