Australian retail department store chain Myer refinanced some debt this week. It’s not enough for Deutsche Bank, who wrote in a note to clients:
This debt refinancing just ahead of the original 21 Aug 2015 due date ($75m due) has given Myer some breathing room… We believe the $600m facility provides sufficient headroom to fund the current operations (allowing for an intra period working capital swing) but there may not be sufficient capital to execute on the strategic review which is still pending. We expect further store closures which would require some capital and may reduce earnings given all stores are reportedly profitable on a contribution basis. We look to the details of the strategic review as the next catalyst, but remain cautious at this time. Sell.
New CEO Richard Umbers has been working on the strategic review since taking over from Bernie Brookes earlier this year. The market will be looking for something pretty special out of that process to be convinced of Myer’s future prospects.
Myer’s main competitor David Jones was bought last year by South Africa’s Woolworths Group in a $2.2 billion deal. The department stores are under attack on several flanks, with shopping dollars increasingly moving online and big-name brands entering Australia via directly-managed stores rather than using a network like Myer’s. Global tie-ups like the DJs deal make sense in this environment, but if Myer continues to close profitable stores you have to wonder what its appeal is going to be.
Umbers is confident that customers still want department stores and that the company can find the right formula.
Deutsche Bank has a 12-month price target of $1.10 on Myer which closed yesterday at $1.34.