Myer's warning last week that a 5 per cent fall in sales in the first two weeks of December would lead to a "material" reduction in first-half earnings has also triggered fresh concerns that Australia's largest department store chain will need to write down almost $1 billion of intangibles on its balance sheet, including $465 million of goodwill and $422 million of brand names and trademarks.
The profit warning sent Myer shares tumbling 11 per cent to a record low of 63.5¢, reducing its market valuation to just $550 million. The shares finished at 64.5¢ on Friday.
While retailing billionaire Solomon Lew and a string of institutional investors have watched the value of their Myer holdings be shredded, former Myer chief executive Bernie Brookes is also wincing.
Mr Brookes holds 3.8 million shares directly and an additional 2.1 million jointly with his wife. Myer shares were at $1.33 a year ago, meaning around $4 million of value has vanished in the past 12 months.
He is listed as the 14th largest shareholder in the last Myer annual report even though his stint at the top of almost nine years ended in March, 2015. A large chunk of Mr Brookes' holding stems back to the 2009 ASX float of the department store group with an issue price of $4.10 per share.
Analysts say Myer's balance sheet is still intact but the group has moved closer to breaching debt covenants, under which its fixed charges cover needs to exceed 1.5 times, and shareholders equity remain over $500 million.
Myer's fixed charges cover is expected to fall from 1.8 times in 2017 to 1.69 times this year as underlying earnings fall more than 10 per cent.
Citigroup analyst Bryan Raymond said Myer's sales would need to decline a further 4 per cent and earnings before interest tax depreciation and amortisation would have to fall 28 per cent before the fixed charges covenant was breached.
However, Myer's creditors and landlords would likely start taking action well before this threshold was reached.
Capital raising not the answer
Mr Raymond told The Australian Financial Review a capital raising to reduce debt was not necessarily the answer, because Myer's debt levels ($140 million) and interest costs ($10 million a year) were relatively low compared with its annual rental expense of about $230 million.
"If interest costs aren't particularly large a capital raising isn't going help materially – if they raised $50 million that helps a bit but it doesn't get you out of your situation," he said.
Myer needed to hope that earnings stabilised quickly as the New Myer strategy gained traction or work with landlords to reduce rents.
"If Myer went into administration or hit their covenants and had actions occur as a result of that, that would be an issue for the landlords as well," Mr Raymond said.
At a strategy update last month Myer said it was working with landlords to reduce rents, hand back floor space or close another 19 of its 63 stores. This is in addition to four already slated for closure.
Morgan Stanley analyst Tom Kierath said Myer's shareholder equity looked well above the debt covenant minimum of $500 million.
"[However], given its continued poor performance, the carrying value of goodwill and brand names must be called into question, particularly given the current equity market capitalisation of about $550 million is considerably below 2017 book value of more than $1 billion," he said.
UBS analysts Aryan Norozi and Ben Gilbert on December 14 also put the spotlight on the weakening balance sheet, saying that while the retailer remained within its gearing covenants "the risk of a breach on a medium-term view has increased, particularly if current trends continue".
Mr Umbers said on December 14 that Myer was not alone and discretionary retailers across the board were under increasing pressure amid a unique confluence of factors. They include the timing of Christmas, rising living costs, weak household income growth and a rapidly escalating shift to online retailing.
Mr Umbers believes many consumers have delayed their festive season shopping because Christmas falls on a Monday this year, giving consumers two weekends in which to finish their buying.
MYR Price at posting:
64.5¢ Sentiment: None Disclosure: Held
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