Myer CEO steps down
The headline news is ugly enough: Myer, which has been operating for 118 years, is now on a perilous downward spiral.
Sales are sliding and foot traffic is down as more shoppers buy online. Those who still like to frequent bricks and mortar retailers are heading to specialty stores, bypassing the patchy offerings and poor service at Myer as the department store model frays further.
Chief executive Richard Umbers has abruptly departed after a third profit downgrade and an unlikely retailer, in chairman Garry Hounsell, has rolled up his sleeves to temporarily take charge – even though he's an accountant by trade. Throwing barbs from the sidelines is furious billionaire Solomon Lew. He wants to wrestle control of the board for his Premier Investments vehicle, which has already burned through $50 million on paper on its ill-timed Myer investment.
But behind the scenes, an even bigger tussle is under way.
Myer is locked in a heated argument with shopping centre owners over what is a fair rent to be paying as sales and profits drop, and whether it still has the pulling power to bring people into malls. Myer wants to cut its total retail footprint by 20 per cent by 2020, but there are fears that more ominous outcomes might occur before it gets near that date.
The same forces are at play around the world as online retailers like Amazon eat away at traditional retailer business models.
Insolvency and restructuring specialist Mark Korda, a principal of KordaMentha, sees real similarities between the plight of the Ten Network last year and the difficult situation in which Myer finds itself.
Decent return
Onerous contracts entered into during better times are dead weights on a business. For Ten it was programming contracts, for Myer it's punishing long-term leases. KordaMentha were appointed as administrators of Ten Network in mid-2017 and a new owner in American network CBS emerged. The big shifts are happening in other industries too as the digital onslaught changes the game.
"There's a mismatch in daily revenues versus long-term leases," Korda says. "It's because the world's changing quickly and the revenue streams are changing."
He says across the retail sector there is a recognition that something has to give. "People are realists," he says. But big shopping centre owners are also reluctant to give up too much, because they've invested large sums in their assets and still want to make a decent return.
Across the industry, more leases are now being negotiated where there is contingency for downsides, rather than the standard turnover rent agreements of yesteryear where the more sales a store made, the more rent would be collected by the owner. "There's a bit of a trend emerging where the turnover rent not only goes up, but goes down too," Korda says.
Myer has total operating lease commitments of around $2.7 billion. There is a lot at stake. Big online retailers only have to lease a large distribution warehouse in industrial areas of down-at-heel suburbs in comparison, and don't have the big legacy bricks and mortar networks.
Difficult position
Four big ASX-listed firms combined hold about 60 per cent of the Myer leases: Scentre Group, Vicinity Centres, GPT Group and Stockland.
Veteran investor Winston Sammut, managing director at Folkestone Maxim Asset Management, says it might not be easy for Myer to accelerate store closures by negotiating out of existing lease agreements.
"Landlords are in a very difficult position. If they give away too much, every man and his dog will be at their doorstep wanting similar cuts to rents," he says.
"It's not just a Myer thing," Sammut says, pointing out other retail tenants are under pressure, such as Oroton whose new owners are fighting for rent relief to keep stores open.
"Then you've got to look at Kmart and Target. Landlords are very careful about not opening the floodgates."
Leighton Hunziker, director of occupier services at Savills Australia and a 23-year veteran of retail leasing negotiations, says "robust discussions" between Myer and its landlords are happening at the moment.
"In many cases, landlords would be happy to receive back space from a tenant like Myer, but it may not be the space that Myer wants to hand back," Hunziker says.
"Myer would want to hand back lazy and unproductive space such as space on 'blind levels' where you have to walk through Myer to get to the rest of the floor. The last thing thing they would want to give up is their prime store front, which the landlord would want," he says.
Better mix
Hunziker says landlords could achieve higher rents and a better mix of tenants by taking back Myer space and re-vamping it, provided they could find new retailers to fill that space.
"It's all part of a commercial discussion. These negotiations are complex." A tenant may want to give up a specific space in one shopping mall, but the landlord might prefer the extra space to come from a different site.
"Myer typically pay very low rent, so you could achieve an uplift in rent and triple the turnover by converting Myer space into space for a new mini-major," Hunziker says.
Also, he says, department stores like Myer are no longer the anchors and drawcards to malls they were in the past. "The overall mix is now more important to landlords. The buzzword is relevance."
Myer's bankers are also watching extremely closely and will have to make tough calls should debt covenants be breached.
Experts point to the United States as a possible signpost to the future.
In early February yet another big retailing chain, Bon-Ton department stores, filed for Chapter 11 bankruptcy protection in the first step in a painful restructuring involving some store closures. It operates about 260 stores under various brands and is a regional department store group which has been buffeted by Amazon and the online onslaught. It's a common occurrence in the US, with RadioShack, Toys R Us and Gymboree among other retailers to go down the same path last year.
Myer's demise has been relatively swift since being freed from the much bigger Coles Myer empire.
It was bought in 2006 by private equity firm TPG for $1.4 billion after the Coles board decided it didn't really fit any more with high-volume, lower-margin stablemates such as supermarkets, liquor, Kmart and Target. TPG and its new management team wasted no time injecting fresh capital on some store upgrades. The firm also helped itself to some healthy dividends by selling off big chunks of real estate which had sat on the Myer balance sheet.
Myer was re-listed on the ASX in 2009 as a single entity, without the protection and extra negotiating power of the bigger Coles group, which a year later was bought by Wesfarmers.
Fashion model Jennifer Hawkins, so closely associated with the Myer brand, was a centrepiece of the hard sell in the 2009 float and was the cover shot of the prospectus in which shares were issued at $4.10. But the stock now wallows between 55¢ and 60¢.
Grim reading
Sales growth figures released by the major ASX-listed landlords in the past few days make grim reading. Things are dismal in the department store sector, with their clout diminishing and specialist retailers becoming more important to landlords, who charge higher rent to the small fry.
GPT has a diversified portfolio with a large component in shopping centres, such as the bustling Highpoint in Melbourne's inner west. Sales in department stores and discount department stores were down 5.4 per cent and 2.7 per cent respectively, it revealed.
It's a stark contrast to the so-called mini-major category, which has easily outstripped that, with sales up 12.3 per cent. For GPT that category includes international retailers such as Sephora and JD Sports and expanding locals such as Cotton On and Mecca.
It's not hard to conclude that shoppers are making a beeline for those stores at the expense of the old-style department stores.
At Vicinity, the second largest owner of shopping malls in Australia, sales at department stores are also worsening. They fell 4.5 per cent in the last six months. In June last year the decline was 2.2 per cent.
