The great sell: How Bernie Brooks prepared Myer for an IPO

Myer released its prospectus yesterday, parading the IPO as the biggest market listing since 2006 and the first after the global financial crisis began. The float, paraded in full page advertisements today across the dailies, is aimed at the three million members of the Myer loyalty scheme as well as retail investors and its customer base.

And model Jennifer Hawkins, who is the poster child and ambassador of the Myer float, is working hard to get the mums and dads of Australia who have always shopped at Myer to feel that they are getting buy in and a piece of the action.

There are no figures available on how many prospectuses have been downloaded but a spokesman from Myer says that 140,000 people pre-registered for the prospectus.

Retail analyst Rob Lake says the company is well prepared to enter an IPO phase, and has picked an opportune time to ignite the market.

“I think retail sales are doing okay at the moment. The market is getting a bit bullish, and I think it’s ready for an IPO. Myer have some good numbers on the board and have left something on the table for the future.”

“Current earnings before interest and tax have grown to 7% and are on the way up, there are new stores set to open so that figure should grow, and it’s good for an IPO to leave some room for growth. I think this is a pretty good move.”

But Lake says it is not just market conditions that bode well for the float. He says Brooks has undone some “bizarre things” in order to get the company in shape for a market listing.

Costs

While sales actually dropped during the 2007-08 year, Brooks managed to reduce costs as part of a massive turnaround project. The basis for this was a detailed examination of the business’s cost structure, line by line, with the business having undergone over 100 improvement projects with many completed over the past year.

“When Brooks took over earnings, before interest and tax, was about 2.3% of sales, now they have 7% and are on the way to 10%. That’s been done almost entirely by throwing costs out of the business,” Lake says.

While sales fell from $3 billion to $2.8 billion during 2006-07, the first year the company came under control of TPG, earnings before interest and tax increased from $165 million to $236 million in 2007-08.

Part of that turnaround has been the introduction of a variable cost base. Brooks has overseen a major restructure of the company’s labour costs, which he said had been entrenched, for some employees, for several years.

“He has seen staff move their hours around to put the majority of staff there when the majority of customers are there. There were some practices where staff had worked when it was nice and quiet, and then they didn’t have staff when it was busy. That brings a reputation for not having good service, so obviously that has been changed.”

Supply chain

Brooks introduced a number of changes to the company’s supply chain, using a few methods he picked up while serving as Woolworth’s managing director, which also contributed to lowering costs and generating healthier cashflow.

Transit times from China were reduced from 42 to 24 days, while suppliers were given instructions to develop merchandise that could be ready for floor display to reduce the amount of handling needed before an item could go on sale, such as asking them to add security tags before shipping.

“Bernie was the first chief executive to go out to the company’s distribution centre,” Lake says. “There he was shown a door that led to an off-site storage facility for the Melbourne store. He saw this as double-handling and wasting time and worked to eliminate it from the company.”

Inventory

Inventory difficulties are a nightmare for retailers during a downturn. Order too much and your cashflow is disrupted, but order too little and you miss out on sales. Brooks sought to control the company’s inventory levels by fixing its supply chain and embarking on clearance sales. Inventory levels dropped from $366 million to $354 million during 2007-08.

Growth ahead

Brooks spells out in the company’s prospectus that the company is embarking on some ambitious growth programs that it hopes will drive up sales due to opening higher-margin selling space. Myer will open 15 new stores over the next five years, with three new sites announced yesterday.

The company also forecast sales of $2.9 billion for the current financial year, along with earnings before interest and tax to jump to $261 million due to the renovated Myer Melbourne store and Brooks’ introduction of updated point-of-sale software.

Customer loyalty

Costco’s recent Melbourne opening has introduced Australian consumers to member-based retail stores, but Myer has been maintaining a similar program for years that has contributed to the company’s current position.

Brooks has said the Myer One program is one of the previous owners’ best business decisions, and now accounts for 63% of the company’s sales. Not only does this provide an opportunity to target discounts and various offers to the 2.6 million Myer One members, the company has used the membership base to identify different customer purchase behaviours and Brooks has introduced tailored offers as a result.

Risks ahead

No doubt Brooks will run a very well orchestrated campaign. But the prices needed to satisfy Myer’s private investors means there is little room for things to go wrong. Brooks will have to keep a very close eye on market conditions, the performance of all retail stores, implementation of new IT systems and supply chain negotiations. Things can change very fast in the world of retail.