Myer’s profit warning to fire up Solomon Lew campaign

Solomon Lew, with Premier CEO Mark McInnes, looks set to continue to stalk Myer. Pic: David Geraghty

Myer’s sales and earnings downgrade shouldn’t come as a shock to anyone, least of all Solomon Lew, who was counting on it.

It has been apparent from the early appearance of the “pre-Christmas’’ sales, and the continuing spate of retailer collapses, that the sector was experiencing tough and deteriorating conditions. That’s particularly been the case for fashion and apparel retailers.

Of the major retailers, the two department store operators, Myer and David Jones, were always going to be heavily impacted and Myer, with Lew’s Premier Investments stalking it, could least afford the disappointment it would generate.

The market already knew (because Premier had forced its premature release) that Myer’s first quarter sales were down 2.8 per cent, or 2.1 per cent on a comparable stores basis, and had been told at the group’s annual meeting last month that the start of the second quarter had provided no relief.

Since then, Myer said today, sales had continued to be below expectations and reflected “ongoing challenging retail conditions characterised by reduced foot traffic, widespread industry discounting and subdued consumer sentiment”.

Despite investing heavily in market and “traffic-driving initiatives,’’ it said, total sales to the end of November were down 2.3 per cent, or 1.8 per cent on a comparable stores basis and sales in the first two weeks of December had weakened further to be down five per cent on the previous corresponding period.

The Christmas trading period is, of course, critical to Myer’s annual sales and earnings. A retailer can’t recover from a truly poor Christmas. Myer now expects its first half earnings to be “materially’’ below last year’s but, given the recent volatility in its sales, was unable to provide a specific range of half-year or full-year earnings.

It isn’t of much help to Myer, in its peculiar circumstances, to say that it is being infected by a sector-wide malaise or, indeed, that its numbers, while down, may well compare quite favourably with those of some of competitors. Even the 62 per cent growth in online sales in the first four months of the financial year is rendered a sidelight rather than a highlight by Premier’s presence and ambitions.

Myer’s new chairman, Garry Hounsell, says he will review all aspects of the business over the next 12 weeks and will drive the group’s management to unlock value more quickly. It is improbable, however, that they can produce sufficiently positive results in this environment to lessen the threat posed by Premier and Lew.

Myer CEO Richard Umbers. Pic: Aaron Francis

At Myer’s annual meeting the incumbent board, with the help of the shareholding of just under 10 per cent of its second-largest shareholder, Investors Mutual, comfortable saw off a campaign by Premier and Lew opposing the re-election of three directors.

Premier did, however, succeed in driving a much larger than normal turnout of votes and won the support of shareholders with, in total, holdings equivalent to its own 10.8 per cent stake. That was with a quite limited campaign, largely confined to press releases and some media appearance by Lew.

If Myer’s financial position — and its share price — continues to deteriorate, however, then the threat posed by the extraordinary general meeting of shareholders Lew has threatened to call to unseat the board and install his own nominees would very quickly become real.

In those circumstances, Lew would pull out all stops, with advertising and telephone campaigns to attract support and proxies. It is unlikely, but possible, if he thought the outcome was in the balance, that he might even average down his entry price by buying a few more shares to bolster his support and lower the board’s.

It is not in Myer’s interests, or Lew’s, for the group to be further destabilised by internal strife even as it is struggling to cope with and respond to the external pressures buffeting the sector.

If Myer is to turn its performance around — and the general conditions for retailers are only a part of the problem confronting department stores — it needs stability and, in an ideal world, access to the deep retail experience that Lew and his team at Premier have.

The world’s not ideal. Relations between the two camps have deteriorated to the point where they are poisonous and Lew isn’t one who forgives and forgets.

There’s also the issue of the conflicts inherent in Premier’s position as a competitor to Myer, as well as (albeit a much lesser issue, given that Myer itself chose to create and maintain it) Lew’s role as a major supplier.

The sensible thing to do, in the interests of the company and its shareholders, including Premier, would be to try to find grounds for a truce.

That would probably involve allowing Premier some representation at board level, perhaps via someone, or some people, acceptable to Premier and Lew but without direct connections to them.

Alternatively, it ought to be possible to create a forum, outside the boardroom, for less formal interaction where Premier and Lew would have the ability to out forward any ideas they might have for improving Myer’s performance.

In the absence of some level of concession, Myer will continue to be stalked and challenged and threatened by Lew — his history says he won’t give up — at a time when it simply can’t afford the distraction and destabilisation and in a situation where, if its performance continues to deteriorate, it risks delivering effective control of the iconic company to a 10.8 per cent shareholder without a takeover offer to shareholders ever being made.