I've bought a few of these over the last few weeks as well. Until recently I've avoided myr for quite a while, having bought and sold them a couple of times in the past, and luckily made small profits at the time. Both times in the past I changed my thesis and exited, concerned about a perpetual decline in demand for this type of store, however I do think there is a place, albeit a reduced place, for this type of store into the future.
Covid I think will have accelerated their turnaround, based on:
- Accelerating the renegotiation of rents.
- Jobkeeper will have supported them through a tough year, where some retail will have dropped off where they didn't have enough liquidity to get through a difficult patch.
- Sharpened their focus on improving the online experience, as well as having more customers now aware of the online option.
I think they are probably now getting closer and closer to a point where they are "right sized", having gradually closed down non performing stores and reducing space in less profitable locations. Some unprofitable locations will still be in play but will be getting ever closer to the end of their leases. The combination of an increase in the online sales, a decrease in rents, and gradually exiting unprofitable locations, will make for a more profitable future. Anecdotally my local myers seemed to be doing a strong trade over the xmas period, DJs seemed to be noticeably less busy the few times I was there. As DJs also closes their unprofitable stores the existing demand for this type of store will be more concentrated in the remaining department stores (both myers and DJs). I think there will always be a reasonable level of demand in the more built up areas. Their model should and seems to be moving towards fewer but more profitable stores, which I think is a sustainable model for the foreseeable future.
This would be the riskiest holding in my portfolio (hence a small holding), however I view the likelihood of serious problems as perhaps lower than the market seems to be, as with every unprofitable store that closes and the rent renegotiations that took place recently the risk has significantly reduced. Where I view the value here is in a reduced portfolio of stores but higher average margins, if we look at a future with $2/share in sales, but with 5 - 7.5% margins after all costs, which I see as feasible, we could be looking at a future valuation of $1 - $2 per share. After all last financial year they still managed to generate approx $50m in FCF after payment of leases, although that was accompanied by a $90m reduction in inventory. That was a very tough year however (the toughest on record I would suggest, with massive lockdowns and consumers tightening the belt), and we should see inventory levels lower over time as more stores close and their inventory management continues to improve. This financial year I think will be significantly better with a rebound in spending, and lower costs. Next financial year should be significantly better again with hopefully the lockdowns ceasing by then and even more costs to come out as more unprofitable stores close. Time will tell, best of luck holders.
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