Retail woes? Myer could learn a lot from Kmart

Myer CEO Bernie Brookes’ outrageous blame shifting over Myer’s weak result doesn’t really stack up when you compare his company’s performance in 2012-13 with that of another leading department store retailer, the Wesfarmers-owned Kmart.

In fact, the cheer squad for Myer in the Fairfax and News Corp papers today failed to attempt any meaningful comparison of Myer’s performance with other retailers in what has been a tough year. That’s not to say there weren’t a lot of positives in the Myer result?—?which was solid, except for a weak second half (which many retailers also endured).

Myer’s costs rose because of higher depreciation for continuing store expansion and revamp (that’s self-inflicted), rising labour costs due to a new award, and higher power costs. But the retailer boosted sales of higher-margin own brands in the year, cut stock levels, interest costs and debt, and it boosted cash flow, all vital financial measures and all heading in the right direction. So Brookes and his management team got a lot right.

But Brookes can’t resist a moan, whether it’s the online imports from offshore or unions, labour costs, rents and landlords. The complaints ring false when you consider that while it’s tough in retailing, some are doing well?—?such as Kmart, Super Chef Group, the Reject Shop and Specialty Fashion Group. All retailers face the similar problems?—?the easy glory days before the GFC have gone as consumers look for value, buy online here or offshore, or save.

Comparisons reveal Myer has been a serial under-performer under Brookes. Compare Myer’s recent performance with that of Kmart.

Myer sold just $3.1 billion worth of goods in the year to July 27, up 0.8% and just 0.4% on a comparable store basis (the accepted basis for comparing retailing sales performance). That was well behind the rate of inflation, so in real terms the company went backwards in 2012-13. Myer had earnings before interest and tax (the accepted measure of retail profitability) of $215 million (down from $230 million in 2011-12). EBIT was 21% below the peak of $271 million in 2009-10. EBIT margin (the ratio of EBIT to sales) fell 6.83% in the latest year.

Kmart, on the other hand, which sold $4.167 billion worth of goods and services in 2012-13, reported an EBIT of $344 million?—?not a surprise, because it sold $1 billion more in the year. But the real story was the rise in EBIT of more than 28% above the previous year’s result, with an EBIT margin of 8.3%, 165 points (1.65 percentage points) higher than the previous year (and much higher than Myer’s EBIT margin). Total store sales growth was 2.7% in the year to June, with comparable store sales growth of 2.1%, so Kmart matched inflation in the year.

And there’s another comparison that marks out the superior performance of Kmart under CEO Guy Russo, who came to retailing from McDonald’s. When he joined back in 2008-09, Kmart’s sales were $4 billion and EBIT was just $109 million. So on around $160 million in extra sales, he and his management team and staff have managed to treble EBIT and generate solid comparable sales store growth.

And Myer’s apologists (and there are more than a few in business journalism) can’t argue that Myer is operating in a tough segment at the upper level of the department store sector due to growing online competition. Myer only has David Jones and a few luxury label stores, plus some big-name foreigners (Zara for example). Kmart faces Target, The Reject Shop and Big W in its segment. In men’s and women’s apparel it faces Lowes, Noni B and Specialty Fashion Group, it takes on Super Cheap Auto in automotive and other car repair franchise groups, plus it is up against the likes of Harvey Norman and JB Hi-Fi in some areas of consumer electronics.

Kmart has battled to get sales growth in the past five or six years, abandoning low margin sales and concentrating on own brands and better merchandising offers and direct sourcing from offshore suppliers?—?all things Myer is doing. But Kmart is doing it better.

While Myer’s financial position is better than the lower profit indicates, and the moaning from Brookes would suggest, its real performance over time seriously lags that of Kmart. US private equity group TPG sold Myer into the market at $4.10 a share in November 2009. The brokers and investment banks associated with the float really sold a dud to the investing public. No wonder TPG pushed its money offshore and away from Australia.

This article originally appeared on Crikey.