Myer’s Survival Tested as David Jones Enters Administration

When the retailer’s doors slide open, shoppers are greeted by rows of slashed price tags, frantic discounting, and all the hallmarks of a department store closing down.

Except this is not David Jones, the embattled upmarket retailer shuttering half its 38 stores. This is its longtime rival, Myer, where entire floors appear permanently on sale.

With Myer’s profitability battered and its share price languishing near all-time lows, David Jones’ slide into administration raises an uncomfortable question: is Myer next?

‘Sustained erosion of relevance’

At first glance, Myer’s headline numbers seem to defy the retail gloom, with double-digit sales growth to $4.1 billion last financial year.

That lift, however, was not driven by surging demand but by the addition of sales from newly acquired apparel chains—Just Jeans, Jay Jays, Portmans, Dotti, and Jacqui E—purchased from billionaire Solomon Lew’s Premier Investments.

Meanwhile, to keep registers ringing, Myer employed “higher than planned promotional activity to stimulate demand,” according to its annual report, which reduced profitability.

The department store has also slashed the value of its brands by more than $200 million in a single year, an admission that its labels are worth far less than they once were.

Department stores have faced a “sustained erosion of relevance over the past five years,” according to IBISWorld market researchers, as online platforms win over bargain-hunters and specialists like beauty retailer Mecca prove more nimble in capturing shifting tastes.

David Jones and Myer, on the other hand, have been weighed down by long-running physical property leases tied to underperforming stores in their sprawling networks.

The era of Australian families being fiercely loyal to either David Jones or Myer is long gone, replaced by a grim battle for both chains to stay relevant.

The stress on big department store profitability has been exacerbated by cost-of-living pressures that have “entrenched deal-hunting behaviour, reshaping how and when consumers engage with department stores,” according to IBISWorld.

Survival tactic or slow-motion bankruptcy

Myer, however, holds a critical advantage over David Jones: time.

While David Jones fell into administration under mounting debts, Myer finished the last financial year with a $100 million net cash buffer, buying management breathing space to fix the business.

It has been reducing store numbers and associated lease liabilities—down to 56 stores from 60 before the pandemic—a restructuring David Jones is only undertaking now that it has collapsed into administration.

For the moment, Myer is leaning into the discounts demanded by shoppers, in the hope that more profitable trading conditions will emerge.

Richard Hemming, editor at Under The Radar Report, says in retail “volume is everything.”

“If you get the volumes through, that customer base will eventually be in a position to pay more, and when volumes and margins both improve, you get that double effect,” Hemming says.

While analysts have mixed views on whether permanent discounting is a smart survival tactic or a slow-motion path to bankruptcy, department stores must move huge volumes of stock to keep cash flowing and clear seasonal goods.

They can use those discounts to drive sign-ups to loyalty programs—such as the successful Myer One program—in the hope of converting shoppers into long-term customers.

Hemming sees an upside in Myer’s current pain, noting the retailer is “cleaning house earlier than rivals” precisely because investors have long priced it “like it’s going to go broke.”

Myer is revamping the business to aggressively pursue online sales.

Advantage over old rival

Myer shares have been heavily sold down over the years, now hovering around the 24¢ mark—a fraction of its $4.10 float price from 2009.

It did, however, receive a price bump on the day David Jones fell into administration.

With roughly two in five Myer stores sharing a shopping centre with a David Jones outlet, investors are betting the coming closure of 19 David Jones sites will hand Myer an easy market-share boost, even as its own long-term turnaround demands further store cuts.

In the short term, the pain is likely to intensify for Myer as the David Jones stores marked for closure clear stock with widespread promotions, luring customers away.

Broader retail sentiment is also souring, as a string of interest rate rises and escalating cost-of-living pressures force cash-strapped shoppers to pare discretionary spend.

The Retail Doctor Group’s chief executive, Brian Walker, says the main long-term advantage Myer has over its old rival is financial flexibility.

“Whereas David Jones was incredibly encumbered, Myer doesn’t have that issue right now,” Walker says.

“As we sit here today, Myer is financially stronger, but strategically still pretty vulnerable.”

Source link