Myer is in danger of a debt default next year, warns UBS

Daniel Pockett/Getty Images
  • Myer is at risk of breaching two out of three debt covenants in the 2019 financial year, UBS says.
  • The analysts forecast earnings to fall by 7% per year over the next three years.

UBS says Myer is at risk of breaching its debt covenants in the 2019 financial year, following yesterday’s disastrous half-year results.

Huge impairment write-downs were the main driver of Myer’s $476.22 million loss for the six months to December, as the company also reported a 4.2% drop in sales.

A string of poor results has brought Myer’s existing debt structure into focus, although UBS said a covenant breach is still unlikely in the 2018 financial year.

“In our view, however, risk of a breach in the 2019 financial year is high, unless a material improvement in Myer’s profitability is seen,” the analysts said.

This table shows Myer’s three existing debt covenants, two of which UBS says are at risk in FY19:

Of the three, UBS says Myer’s Fixed Charged Cover (FCC) has been the covenant viewed most at risk.

An FCC measures a company’s ability to pay all of its fixed debt obligations out of income earned (before interest and tax charges).

UBS says an FY18 breach of the FCC covenant would required like-for-like (LFL) sales growth to fall by 8% — well in excess of the UBS estimate of -1.7%.

However, in the 2019 financial year a fall in LFL sales growth of just -2% will trigger a debt breach, UBS said.

The shareholder equity covenant is also at risk given yesterday’s asset write-down of over $500 million, which was reflected in a commensurate fall in equity.

In addition, “post-impairment intangible asset growth and profitability assumptions still look optimistic”, the analysts said.

UBS forecasts Myer’s earnings will fall by around 7% per year over the next three years.

They said sales growth is unlikely in the short-medium term due to: Weaker consumer spending, a structural shift out of department stores and the threat of Amazon — “Myer’s major categories are most exposed to Amazon” — and fast-fashion retailers such as Zara.

“We believe Myer needs to shrink to greatness to address structural challenges and become a more targeted, nimble and profitable business,” UBS said.

“That said, it is costly and we do not believe the balance sheet — as it stands today — can support this.”

UBS said Myer needs to reduce space, with a large portion of stores only breaking even or dragging on margins. But that would involve the renegotiation of Myer’s onerous lease contracts with significant up-front costs.

Operationally, UBS said Myer needs to invest in its online capacity, reduce its product range and use data to effectively focus on exclusive, demand-driven products more suited to an in-store experience.

“The challenge with the above in our view, remains the pace and cost at which it can be done given the large number of stakeholders involved,” UBS said.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.