Another mixed day for Asian markets

Asian markets may be in for another mixed trading day today following weak leads from the US overnight. The economic situation in Europe is still front of mind with investors, who remain cautious overall.

In Australia, retailer Myer has no doubt downgraded its earnings outlook for the full financial year, saying it now anticipates net profit to be no worse than 15% below last year. This compares with prior guidance for earnings to have been no worse than 10%.

When Myer reported its earnings in March we said, based on management’s wording, that the door was open for more downside to earnings. That opportunity has now been exploited.

Comparable sales continue to fall, down 2.1% on a comparable basis for the quarter. Last year’s two 25-basis point rate cuts don’t seem to have worked and spending fell away heavily in April, in line with what other retailers have been telling us.

New South Wales and Victoria have continued to drag down an otherwise reasonable result by Western Australia, South Australia and Queensland.

Myer’s failure to lift comparable sales growth is, we think, the primary issue. Comparable sales numbers aren’t exactly coming off a high base. The business has continued to struggle with its sales metrics ever since listing.

There needs to be a significant game changer and one sooner rather than later for the market to start pricing in some trust. Myer also doesn’t enjoy the financial services and credit card fees which David Jones books through its American Express agreement, even though that fee revenue is set to fall for David Jones.

Bottom line: A retailer cannot grow earnings over the medium to long term without growing its sales. Comparable growth for Myer continues to be negative and it seems like operating costs have been cut to the bone.

The money spent on acquiring Sass & Bide last year would have probably been better spent on boosting online capabilities. The falling Australian dollar could see less deflationary pressure, particularly in apparel, should fragmented importers who often don’t have hedging like the major retailers, pull out of the market.

The recent 50 basis point cuts in interest rate, carbon tax money, school bonus payments and tax cuts are all due to flow over the next few months and might boost earnings, but it’s not enough to earn back market trust until Myer can convince the market of its medium to long term plans to boost sales. We prefer other listed retailers.

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