Tough times in store for Myer as department store chain seeks lease relief

Myer is seeking lease relief from shopping mall landlords Picture: Greg Adams

Struggling department store chain Myer is believed to be asking its landlords for shorter lease agreements and to exit some of its malls, after it closed for business last week because of the coronavirus crisis.

The move comes as the retailer’s share price languishes at 14c, taking its market value to just $94.45m — a quarter of what it was worth at the start of the year.

Myer announced last week that it would shut all its stores for at least a month and stand down some 10,000 employees.

The understanding is that the department store chain has been engaging with insolvency firm Korda Mentha to address its financial challenges, although this is believed to be in the form of seeking assistance with leases and loans rather than working on any move to place the company into voluntary administration.

Myer has about 60 stores, with lease agreements that range from five to 60 years. It is understood the department store wants to shorten some of its leases, and exit certain malls altogether.

However, analysts say solving the problem is not clear cut. Myer negotiates leases with certain major landlords — such as Westfield owner Scentre Group, AMP, Lendlease and Vicinity Centres — as package deals rather than on an individual basis.

It is thought that Myer wants to stay in all its Perth, Melbourne, Sydney, Brisbane and Adelaide CBD stores. In Sydney, it would also probably continue in Chatswood, Bondi, Warringah and Macquarie.

However, the chain is looking to exit its stores at its Parramatta, Eastgardens, Bankstown, Liverpool, Penrith and Shellharbour locations in NSW.

In Melbourne and some regional locations, this would also probably be the case for Frankston, Mount Gravatt, Werribee, Bendigo and Albury.

In Western Australia, the thinking is that an exit from the Joondalup mall would also be sought, as would a departure from the Carindale mall in Brisbane.

The understanding is that Myer would ideally like to decrease the size of the business down to about 20 to 25 stores, and at this size some believe the chain would be highly profitable, given almost 40 per cent of profit comes from about five flagship stores.

The 60 stores generate about $2.9bn in sales, while rival David Jones has about 30 stores and a turnover of $1.8bn.

Merging David Jones and Myer could create a retailer with about 40 stores with a $4bn turnover, which some believe would be the ideal solution to the challenges faced by the two large department store groups. However, neither has the money to initiate such a move.

The retail asset class is struggling worldwide, with Macy’s in the US announcing overnight on Monday that thousands of its workers would be stood down as it temporarily shuts its doors.

Myer had $38.7m of net debt in December, and some fear it may be breaching its debt covenants.

Extracting itself from its leases is expected to involve a fair amount of horse-trading that may see the department store exit leases at less desirable stores in exchange for taking a smaller amount of space in CBD malls, where landlords could lease the space at a higher rate.

This is given that the department stores are typically known to pay low rents.

The challenge for landlords is the lack of additional tenants lining up to take the vast amount of area occupied by Myer, with global fashion labels no longer cutting a track to Australia to open stores in this market.

Landlords in recent years have put on a brave face, saying the vacancies left by struggling apparel retailers were being replaced by food and lifestyle outlets.

However, some believe the coronavirus crisis has demonstrated how that strategy is flawed, with such groups also likely to face major financial stress in the months ahead.