Hi.
The NCK profit upgrade is the latest in a string of upgrades in the retail sector. Prior to this, perhaps the two most interesting market sensitive announcements were MOZ (for women's apparel) increase in margins of 6% as well as ADH margin increase in the same vicinity. Both bode very well for Myer to extract higher margins this half than they would have otherwise.
In terms of the FCF over the last few years, it has been accompanied by aggressive inventory management (from management commentary, mostly obsolescent inventory), so have to be careful with that assumption. However, days inventory has dropped from ~97 to 82 since 2018, and I expect to improve further next year as online becomes a larger and larger share.
The long-term viability of the business is interesting. I guess the consensus view is that department stores are dead because of changing consumer preferences + the rapid shift to online. My view is somewhat different based on my reading around this. This is all conjectural but I think the decline of department stores is predominantly because of the middle class squeeze. Supporting this notion is:
1. Myer itself was steadily growing up until 2012 when it abruptly stopped (go and look at google trends), this corresponds with the period of "secular stagnation"
2. It seems that luxury and discounters have done well in the following period, whilst brands that cater predominantly to the middle have suffered dramatically (in fact, the department stores are the last brands standing in many ways for this demographic).
3. On top of this, there have been internal changes to the industry structure- growth of online, which has resulted in weakened negotiating power for the big landlords (which is ongoing) + significant number of VA from mid-market brands putting pressure on leasing spreads + growth of homemaker centres (Aventus etc), also shifting power away from the landlords. The department stores were also the target of waves of private equity buying and asset stripping in the decade prior, which left them with weaker balance sheets to invest in their businesses. Thankfully, this process is well and truly finished. These trends, have already commenced and have some way to go. But hierarchically, these changes are just noise to the true signal being the middle class squeeze.
From what I can see, there are tailwinds in industry structure that are definitely going to favour retailers in the years ahead, but the real cherry on top, if it occurs (or rather when), is when the middle class starts to grow again, in which case there may be an opportunity for growth.
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