If Myer (MYR) shareholders want to get an idea about what it will take to restore the department store to health, take a look at Metcash (MTS) which is in the midst of a lengthy, five year turnaround attempt.
Metcash has had two and a bit goes at restructuring in the past three years and that has included a big cut in dividend which it has now linked to earnings and not to a very high level to maintain the company’s attraction as a dividend paying company.
The share price has suffered as a result – but that’s not so much a concern for Myer where the shares have plunged from less than the $4.10 issue price in late 2009 to around $1.60 yesterday.
Metcash shares have collapsed in the time since the revamps started in early 2012. They were trading around $1.48 yesterday, less than half what they were when the changes started in early 2012.
The first set of changes at Metcash came in April 2012 and saw 478 jobs cut, outlets closed and more than $100 million in impairments and restucturing costs revealed.
The shares were trading above $4.20 at the time. Those changes failed to have a significant impact on the company’s operations which remained under pressure with profit margins being crimped and revenue growth sluggish.
Management was changed and a new round of changes were planned. In late 2013 it split parts of its business into separate items and then in March of last year revealed a far more sweeping change (sneaking it out late on a Thursday night after trading had closed).
That saw the company’s shares plunge 10% to $2.83 the next day (a Friday) – the lowest they had been for more than a decade (up till then), as shareholders absorbed the flood of bad news about the downgrade, and then the cost of the revamp and how shareholder returns will be cut to help pay for it.
The company warned that profits for 2013-14 would be lower and the dividend will be cut for several years to help pay the cost of a huge capital spending program that could cost $700 million over the next five years. The dividend would be cut to 60% of earnings and the dividend reinvestment plan continues.
Management admitted that the early stages of the restructuring program (called Project Diamond) were impacting revenues and earnings.
Then in December, the half year results were released and they were weaker than expected, and down went the shares again, dropping 15% at one stage as the company revealed a 9% drop in earnings before interest and tax to $165.8 million and a 31% fall in dividend to just 6.5c a share.
Now there are rumours around the retailing industry that Metcash is in more trouble with talk the company is struggling to to make the forecast earnings before interest and tax of $315- $330 million.
So what’s this all mean for Myer and its shareholders?
Well, that they have to expect weak earnings, in fact big falls and perhaps losses, certainly impairment losses, store closures, job losses (which all could hurt some of the shopping mall companies such as Federation and Scentre).
And they have to be prepared to accept a big cut in dividend, or even its abandonment for a while to help finance the latest turnaround plan.
Myer’s dividend is definitely is too high for its present circumstances, let alone what the results on March 19 will bring. In 2013-14 it paid a total of 16c a share (an interim of 9.5c a share and a final of 5.5c), down from the 18c a share paid in 2012-13 (10c a share final and 8c a share final). That is definitely unsustainable and looks like being cut, as Metcash has done.
And Myer can look to the UK where retailers are struggling, especially supermarkets, and slashing dividend as a result. Tesco has dropped its dividend completely for 2014-15, besides axing stores, offices, senior executives (including the CEO and chairman) and taking billions of dollars in losses. It is also being investigated for accounting irregularies of more than half a billion Aussie dollars.
Sainsbury, another big supermarket chain, has decided to cut its dividend to help finance price cuts (and slashing spending, jobs, store numbers and taking huge losses on write downs). A third retailer Wm. Morrison is expected to reveal a halving of profit when it announces full year results next week. It will maintain a commitment to lift dividend for the year by 5%, then abandon the idea for the coming year, setting it much lower – between 40% and 60% lower is the forecast from London analysts.
All three are being battered by sluggish demand and the aggressive market share building discounting by so-called ‘hard’ discounters from Germany – Aldi (which is hurting Metcash in Australia) and Lidl.
Both are growing sales and taking market share from the likes of Tesco, Sainsbury and Morrison, but not the upmarket supermarkets operator Waitrose.
According to local analysts, Myer will need to find upwards of $200 million over the next three years to spend on online and ecommerce areas of the retailer, as well as revamping stores (which seems to be never ending).
But before then stores will be shrunk in size, or closed, with write downs and exit costs expensed against profit, more poor selling product lines axed and more management and staff changes.
Myer has 78 stores across the country and that will be cut – by how much no one knows, but given the current sales performance, it is clearly too many.
At 16c a share, the dividend in 2013-14 cost Myer over $93 million. Halving that over three years would generate more than half the $200 million analysts reckon the revamp program will cost. But that assumes no change in the company’s profitability, which there clearly has been from comments made this week by the board and the need for change and transformation.
So dropping the dividend for three years might be the right, but tougher option.
