Myer, which I’d argue has been in a slow structural decline for some time, is trying to revitalize its operations by acquiring Premier Investments' Apparel Brands segment, which includes Just Jeans, Jay Jays, Portmans, Dotti, and Jacqui-E.

The Apparel Brands collectively saw a 6.4% decline in sales for FY24 but remain well above pre-COVID levels. While they aren't in the same league as Smiggle or Peter Alexander in terms of performance, they are still relatively strong assets -- at least next to Myer's..

The Apparel Brands' EBIT margin stands at 9.7%, compared to Myer's 2.3%. So, while Myer has larger sales, its profitability seriously lags behind that of the Apparel Group.

As for Solomon Lew, although his personal stake in Myer will decrease slightly, he will remain the largest individual shareholder. The merger should create a stronger business overall, and Lew will also secure a seat on the board. And it leaves Premier with the best parts of its business.

My thumb suck based on the pro-forma numbers is that Myer is on a forward PE of (very) roughly 10. That's probably about right, but not nearly cheap enough for me.

No shooting the lights out but steady as she goes.

Potential upside moving forwards:

• Divestment of apparel brands unlocking value (advisors currently reviewing)
• Ongoing accumulation via premier investments
• Economy surprises to upside (In the first six weeks of 2H24, Department store comparable sales are up 4.9% over the corresponding period in the prior year. - As per announcement)

In the interim can clip a 5-8% FF dividend while you wait.

$200ish million net cash on the balance sheet provides downside protection and offers attractive option for acquirer.

Feel like on balance an easy hold for me currently.

Defying the dire predictions of recession and retail armageddon Myer reports flat sales and expects an NPAT of ~$50m for the half.

A pretty good result probably putting them on a P/E of 8-12 for by the end of the year.

Premier continue to buy 2% every six months like clockwork.

Interestingly there could be some extra value unlocked through brand divestment?

https://www.afr.com/street-talk/myer-launches-buyer-search-for-trio-of-fashion-labels-kpmg-hired-20240208-p5f3cn

Obviously a terrible stock but it does feel as if people continue to underestimate it and a few catalysts in play in combination with a reasonable fully franked dividend makes me reluctant to move on.

An overnight success 5 years in the making.

Positive commentary today on the call and despite significant ongoing investments in stores, staff online and distribution throwing off significant cash which is now starting to be returned to share holders as FF dividends.

https://www.afr.com/street-talk/premier-investments-creeps-on-myer-pays-up-for-stock-20230227-p5cnxo

Premier investments continues to slowly takeover Myer at the allowed rate of 3% every six months.

Myer update today

Myer currently expects its 1H23 Net Profit after Tax to be between $61m and $66m.

This would at a rough glance place the current valuation at a PE of 8-10 with a robust balance sheet and likely ~6% FF div.

Seen it all before but does seem to be a line of breadcrumbs heading to this eventuality...

https://www.afr.com/street-talk/myer-runs-as-sector-m-and-a-lights-up-20230122-p5cem1

Now 0.00% from one of the most shorted stocks on the ASX

Turn around intact.

In a nutshell currently growing top line / PE ~ 8-10 / Div yield ~6% / Positive Commentary

Probably some increased Capex over next 12 months as they build the online distribution centre for ~$20million.

Good growth in top-line particularly in the online sales which now represent around a quarter of revenue.

In the call CEO John King pointed out that their online sales growth was actually beating a lot of pure play category competitors overall as well as within a few select areas.

Dividend increased to 2.5 cents With so much takeover and merger speculation you don't want too much cash on hand.

A great result and just goes to show competent management can make a big difference by having a focussed vision and just making many small improvements that add up to a big change in the bottom line.

Topline up 8.5%

Online sales close to 30% of all sales and grew almost 50%

NPAT $32.3mil

Net cash is $217mil

Capital return has begun now that the balance sheet is pristine with a $1.5cent fully franked interim dividend

Net cash a bit less than I was expecting due to inventory build (might have predicted this as everyone is doing the same thing currently due to supply chains).

Fundamentals continue to improve in my opinion and with surplus cash now being redistributed to share holders in a tax efficient manner and a few other catalysts still in play I'm not complaining.

Myer is a chain of department stores in Australia that has operated for more than 120 years. It was floated on the ASX in 2009 after a private equity firm had liquidated most of its property assets and then leased store sites from the new owners. This had predictably bad subsequent results especially when combined with a societal move from brick and mortar retail to online. Further erosion of value occurred with a well intentioned but unfruitful store revamp attempted by the prior CEO. In 2018 John King was appointed new CEO and he brought a previous colleague into the fray Nigel Chadwick as CFO. John and Nigel had pedigree credited with the turn around of UK department chain house of Fraser and its profitable sale to a Chinese consortium.

John and Nigel have stripped Myer’s strategy back to basics. 

• Cost control: Reducing floor space where able and closing unprofitable stores. No expensive ego driven store refurbishments, sensible capex on online and distribution.
• Inventory control: Reduced inventory, wrote off significant amounts. Aimed to get rid of brands that were unprofitable and the focus put on in house brands with higher margin and avoiding sales that boost revenue but are ultimately unprofitable.
• Focus on Online: Steady and significant growth of online channel now accounting for ~25% of all sales.
• Paying down Debt: Dividends had already been cut but free cash flow was prioritised to pay debt and renegotiate working capital loans now leaving them with a net cash position.

Valuation

Takeover value: Liquidation somewhat theoretical due to long term lease liabilities however I think it’s a great company to consider what you would pay to own the whole thing.

The high point of the balance sheet tends to be at the HY last year it was $201m with $265m of inventory if we value this at 30% of that it gives us $280m. Add land and buildings of $22m and plant, equipment and other fixtures and fittings book value of $300m value that at 20% = $60mil. This gives us a conservative value of $362m in assets. This is around 5% greater than current market cap. Essentially you get a profitable business thrown in for free. (Also this is based on last years numbers so you can probably assume another $40-80mil to the net cash position)

IRR: Covid has made it hard to predict coming results but assuming business throws off $50mil this year in truly surplus cash and you buy shares for $0.41 and there is no significant dilution of the 821m outstanding shares and likely deterioration of FCF by 0-5% per year then I still get around a 12% return. 

Potential catalysts:

• Dividends restarting: Due to net cash position and ongoing FCF, headroom with the covenants. An effective way to return capital given the franking credit system.
• Take over: Solomon Lew (of Premier investments) over the last two years has purchased almost 10% of outstanding shares on market to bring his holdings to 19.88% an interesting number as going over the 20% threshold would usually require a takeover bid. You can see for the above reasons why a takeover might be interesting and value accretive to the acquirer.
• Rerating given online growth: Online side of the business is growing rapidly and as stated is 25% of sales. This is a significant asset which I think is overlooked when investors look at Myer and see a brick and mortar retailer.
• Spinoff of online assets: Myer’s primary issue is the length of its leases leading to concern that it can remain profitable enough to both generate free cash flow moving forwards and pay its leases. If the online business was to be cut away from the leases it may be a catalyst for realising significant value.

Section 606 prohibits the acquisition of a relevant interest in voting shares if, because of that transaction, a person's voting power in the company:

• increases from under 20% to over 20%

Take over finally about to happen? ...Pretty interesting!

Results today look pretty good. Better than I had expected given sydney and melbourne lockdowns.

With net cash of 111 mil inventory of 300 mil and a NPAT of 46 million its crazy to think you could pick up shares in March 2020 at a market cap of ~75mil!

At today's prices still seeing a P/E of ~10 and a cashflow yield of 25% plus a healthy balance sheet. 20% sales are now online.

Interestingly PMV have upped their stake from 10.77% to 15.77% . 

Solly has been looking to gain control of the Myer board without forking out for a takeover. I think that this may represent more of the same in regard to that strategy although possibly could be a precurser to a full takeover.

I have exited my position due to concerns Re: lockdowns and long term lease agreements but ultimately price has put this into the too hard basket for me. 

For all those celebrating their high quality company returns since the covid crash I think it's worth noting that from the March low Myer (a brick and mortar department store) has acheived a return of just under 500% from a low where it traded around 70% of net cash on the balance sheet (lease liabilities and inventory excluded). I had the joy of reaping most of this gain within my personal account from an unfortunently small base but alas only added it to strawman from around 20 cents. Still think it is likely cheap but my comfortable margin of safety is gone so I'm out for now.

Despite the negative market response to the HY21 report I think the deep value thesis remains intact. 

On the 22/9/2020 Geoff Wilson wrote to the Myer board suggesting that they reduce the number of directors and board renumeration to make it more in keeping with Myer tiny $180mil MC. 

The response outlined the upcoming resignation of two board members who will not be replaced. 

There is some more questions Re: supplier agreements and dividends but no new information here.

Can Wilson's letter can be read here and the board's response here.

Under new CEO Myer has adopted prudent capital managment and cut dividend, reduced debt, cut unprofitable sales, clearing out unwanted stock, reduced floor space, refocused on exclusive higher margin brands.

At the same time managment have all been buying on market and have a mandate to hold the value equal one years worth of director's fees.

Then along came Covid and as the saying goes everyone has a plan until they get punched in the face.

Never mind that though all this has led to a topline declining but Myer could still post a healthy net cash position when it next reports due to improved margin and cost control (annnd... jobkeeper cough cough). FY19 it had a free cash flow of ~70 mil You probably just have to ignore FY20.

with an EV/FCF of <3 (probably) I'm happy (sort of) to initiate a small position at this point. If it falls significantly I will likely average down from here (unless I chicken out again).