Myer Holdings Limited is founded by Sidney Myer in Bendigo, Australia in 1900 (Myer 2012). It is the Australia's largest department store group with some product categories including: menswear, childrenswear, womenswear, young fashion, fashion accessories, homewares, toys, electrical good, general merchandise and intimate apparel (cosmetics, fragrance, and beauty). Myer has owned more than 50 exclusive brands including Blaq, Basque and Vue. This Myer Exclusive Brands (MEBs) represents 17.4 percent of the total sales in 2011. The company has also established two global sourcing offices in Hong Kong and Shanghai which is to improve company profitability. Myer Holdings Limited has held the interest in entities which includes: Warehouse Solutions Pty Ltd, NB Lonsdale Pty Ltd, ACT Employment Services Pty Ltd and NB Elizabeth Pty Ltd (Ninemsn Finance 2012).
Besides that, the company has 67 stores in prime retail locations across Australia with employs more than 14,000 employers (Myer 2011). Furthermore, the company has a loyalty program which called as MYER One. By introduce this loyalty card, it helps Myer to keep their customer records, track their customer's buying habits and encourage their customers to shop at Myer. This loyalty card has three levels which are Myer one, Myer one silver and Myer one Gold. On 17 March 2011, Myer had more than 3.9 million members which also contributed 69% of the total sales for the first half year 2011 (Myer Holdings Limited 2011). Not only that, Myer has also Myer Visa card program which is also a part of its customer loyalty strategy.
Moreover, Myer has launched an online gift store in October 2007 which includes miss shop clothing, perfumes, gift cards and electronic goods. In 2011, Myer also launched an online shopping site which makes people in Australia easier to shop at Myer. Not only that, Myer also had its online shopping for iPhone and iPad. In addition, Myer has three main competitors which are David Jones Ltd, Target Australia Ltd and Kmart Australia Ltd. These three competitors will be further discussing under Industry Analysis part.
Company History
Myer Holdings Limited is listed on Australia Stock Exchange (ASX) on 2 November 2009 with the code of MYR (ASX 2012). In 1911, Sidney Myer was established a department store on site which called The Myer Emporium. As the business grew, the company was opening the first Myer factory in 1915. When the Australia went to the war, The Myer becomes a main clothing supplier for the military. Over the time, Myer has some development and diversification of its business which the company went into new opportunities such as specialty fashion retailers, discount department stores, fast food outlets and ventures in finance, travel, film production and land development. In 1985, the merger of Myer and Coles for AUD 1.07 billion was the largest deal in Australia corporate history. However, in 2006, Myer was sold to Blum Capital, Newbridge Capital, Texas Pacific Group (TPG) and the Myer family for AUD 1.4 billion.
Recent Company History / Development
In 2010, the CEO of Myer Holdings Limited, Bernie Brookes had successful in operating Myer as its sales was increase by 0.7 percent to AUD3,284 million and its earnings before interest and tax (EBIT) was also increase by 14.9 percent (Myer Holdings Limited 2011). Besides that, there is also a significant improvement which is the net profit after tax increase by 55.1 percent to AUD 169 million compared to last year that only had AUD 109 million. By release this information to public, the share price of Myer Holdings Limited (MYR) is also increased by 12 cents to $3.22 (ABC 2011). However, due to unstable global economy, Myer Holdings Limited is affected as in 2012, its full year net profit down 14.3 percent to AUD 139.365 million compared from last year (Esther 2012). Its total sales also fall 1.3 percent to AUD 3.119 billion compared from a year ago.
INDUSTRY ANALYSIS
DEPARTMENT STORE ANALYSIS
The retail industry has been reported to be in to be a struggling industry in the year 2011.It was an extreme challenging environment as the customers confidence was impacted by an increased cost of living pressure such as health care, education, new taxes in flood levy and proposed carbon tax. Furthermore the department store as they act as intermediate by purchasing from the wholesalers and manufactures and sell to customers without changing the product the research shows that it has incurred a decline in sales due to the above mentioned reasons other factors (Australian Bureau of Statistics 2012).
KEY SENSITIVITIES (RISK) OF THIS INDUSTRY
According to Industry Risk Rating report from IBIS world (evaluated that there are 3 risks associated with industry are risks associated within the industry (structural), risks arising from expected future performance (growth risk) and those associated with the external factors (external sensitivity). The structural risks include competition and industry volatility, growth risk includes growth analysis and sensitivity analysis includes interest rates risks and exchange rate risks (International Business 2012).
KEY SUCCESS FACTORS (STRENGTH)
The key success factor of the department store market in the industry is to be engaged in the overseas completions as they have to develop online stores that sell internationally with free shipping. The industry also has to maintain its brand equity doing so by repeat purchase, competitive advantage through price integrity and long term profitability through loyalty. In addition it is necessary for the department stores to have system that create a successful, efficient and happy customer experience and the supply chain efficiency in order to speed to market and continual renewal of the latest fashion and technology.
COMPETATIVENESS OF THE INDUSTRY
As outline by Ramirez (1986) department store have shape up in order to beat the competition from specialty shop as they develop a clear image and a reputation. The fact that it is selling the basic commodities makes it more competitive as they are also based on customers satisfaction and loyally, improved technology, diversify, leverage and being involved in promotional campaigns and implementing the best strategies that will outweighs the other industries.
DOMESTIC AND INTERNATIONAL OUTLOOK
In recent era it has be indicated that the department store is face with difficulties due to recession and global financial crisis as customers were reluctant to spend their hard earned money and they were very cautious on the spending. According to Taylor Woodings (2012), there will be a slow growth of 1.0% per annum over the 5 year. The increased competition overseas through online stores causes non -food retailing industry has incurring this decline as by 1.2% in October 2011. Hence in the food retailing was 4.4% as the food is a basic commodity in the market. The risk of low turnover, decrease brand loyalty and decrease profit will affect the borrowing company in a negative way as it will be faced with difficulties in the industry.
MITIGATION OF RISK
The risk can be mitigated in several ways such as maintaining a strong focus on reduced cost, manage promotional programs, and improve the operational gross profit margin. They should also have to maintain a strong balance sheet and they also have to diversify such as global diversification such as sourcing in Shanghai and Hong Kong and purchasing new brand that complements the woman wear.
FINANCIAL ANALYSIS
While making the lending decision, it is important for the lender to analyse the financial statements of the company in order to have valuable understanding of financial performance of business.
SHORT-TERM LIQUIDITY
MYER HOLDINGS LIMITED
Current Ratio
2009 ($'000)
2010 ($'000)
Current Assets
601,786
482,692
Current Liabilities
594,215
557,414
Current Ratio: Current Assets / Current Liabilities
1.01
0.87
Liquidity ratio is can provide the idea of the capability of MYR Company to meet its short term obligations. The current ratio could be used to predict the liquidity position of a company. Based on the data gather from the MYER Holdings Limited's annual report (Appendix 2), its current ratio of financial year ending 2009, 2010 and 2011 are 1.01, 0.87 and 0.81 respectively. A current ratio that is lower than 1 show that it is risky since there is not enough current assets to meet its current liabilities. In this case, the latest current ratio is 0.81 which is derived from $446,751,000 (current assets in 2011) / $552,190,000 (current liabilities in 2011). This indicates that in the result of default, the current assets only covers 80.9% [1] of the current liabilities when the current assets need to be realised.
The current ratio of these three years have been falling each year from 1.01 in 2009 to 0.87 in 2010 and fall again to 0.81 in 2011 (Appendix 2). The current ratios of 2010 and 2011 have even fall lower than 1. The fall in current ratio in every year might cause concern as it shows that there has been decline in the company's liquidity position (NetMBA 2010). As the current ratio decreases, the lender's risk is increased due to the decline in terms of capability at meeting the short-term obligations. However, shareholders usually prefer a lower current ratio as this shows that more of the firm's assets are used to improve the business.
LONG-TERM SOLVENCY
MYER HOLDINGS LIMITED
Current Ratio
2009 ($'000)
2010 ($'000)
Debt
879,005
419,919
Equity
380,122
857,440
Debt-Equity Ratio: Debt / Equity
2.31
0.49
The long-term solvency of the business is depends on the proportion of owner's equity compared to debt that being used to finance the business. When the equity financing portion is larger than the debt financing portion, means the financing is good. As the table shows, the debt amount is larger than equity amount in 2009 but at 2010 and 2011, the situation changed which the equity amount is greater than debt amount. This also means that this company has improved in term of financing.
Using the debt-equity ratio method allow the comparison of debt amount to equity amount. A low debt-equity ratio result from higher equity compare to debt amount will make creditors to feel secured. The larger the equity means more funds are invested into the company to ensure business to be success. The chances of loan repayment will also increase due to the business successful level.
In the case of MYER, the ratio of 2.31 times is considered risky since the company depends on debt financing rather than equity financing during the year 2009. However, at the year 2010 and 2011, the company has changed its financing approach from debt to equity. In these both years, there is significant improvement from the debt-equity ratio which reduced to 0.49 times. In the latest data (2011), the debt-equity ratio of 0.49 times indicates that out of the total financing, 67.2% [2] was equity financing and 32.8% [3] was debt financing. This company will be safe for lender to lend money to since the equity portion is much greater than debt portion which lead to greater business performance.
BUSINESS PERFORMANCE - NET PROFIT-SALES RATIO
MYER HOLDINGS LIMITED
Net Profit-Sales Ratio
2009 ($'000)
2010 ($'000)
Net Profit
108,749
67,182
Net Sales
2,798,916
2,825,034
Net Profit-Sales Ratio: Net Profit / Net Sales
3.89%
2.39%
*refer to Appendix 2
DAVID JONES LIMITED
Net Profit-Sales Ratio
2009 ($'000)
2010 ($'000)
Net Profit
155,297
170,766
Net Sales
1,985,490
2,053,087
Net Profit-Sales Ratio: Net Profit / Net Sales
7.82%
8.32%
*refer to Appendix 3
WESTFARMERS LIMITED
Net Profit-Sales Ratio
2009 ($'000)
2010 ($'000)
Net Profit
1,522,000
1,565,000
Net Sales
49,023,000
49,865,000
Net Profit-Sales Ratio: Net Profit / Net Sales
3.10%
3.14%
*refer to Appendix 4
Net Profit-Sales Ratio
Companies
2009 ($'000)
2010 ($'000)
2011 ($'000)
MYER HOLDINGS LIMITED
3.89%
2.39%
5.99%
DAVID JONES LIMITED
7.82%
8.32%
8.57%
WESTFARMERS LIMITED
3.10%
3.14%
3.63%
To determine the financial stability of business, lender can compare the business' net profit by year with competitors of the same industry. The net profit of MYER Company in the year 2009, 2010 and 2011 are $108,749,000, $67,182,000 and $159,665,000 respectively. From the year 2009 to 2010, there is a decline in net profit for MYER by 38.22% [4] which is unfavourable since this might affect the repayment to lender. However, during the year 2010 to 2011, the net profit has improvement which is a magnificent increment of 137.66% [5] . In this case, MYER shows that the company has a strong and good business performance which is favourable for lender and able to repayment its loan without problems.
Viewing from the net-profit sales ratio comparing with the competitors, MYER Company is less stable compare with other competitors. This is because the changes in the net-profit sales ratio are too greater compare to other competitors which only have slight changes in percentage. Therefore, this might concern the lender's decision whether to approve the loan since it is risky due to unstable changes of net profit.
Security
Collateral security is a very important aspect in providing a loan as it offers security for the loan in case a borrower defaults (investopedia.com). Collateral here is a secondary source of payment, that is any asset that the lenders usually take possession of and dispose it to use the proceeds to offset the outstanding amount on a loan that a borrower failed to payback.
A security on a loan can be in form of assets example house in a mortgage loan, vehicle in an auto loan, or inventories, receivables and machinery (Sathye et al, 2003). MYER also as a corporation when applying for loan financing is expected to produce or state some form of security against the loan they asking for. According to media-corporate.com the annual report of MYER in 2010 until 2011 shows that this corporation possesses some assets that can be collateralized as security for the loan in case of loan default.
Securities that are used as collateral possess certain qualities such as the price of the security which is supposed to be stable and not subject to much fluxes, should be highly liquid, security should be durable as well as portable for easy movements from one area to another (Sathye et al. 2003).
KEY EXISTING ISSUES FROM EXISTING SECURITIES
LIABILITY
2010
2011
2012
Current Liabilities
Trade and other payables
AUD$437,568
AUD$416,032
AUD$394, 137
Derivative Financial Instruments
AUD$ 1,208
AUD 7,476
AUD$2,490
Current tax liabilities
AUD$ 9,446
AUD$ 33, 897
AUD$15,191
Provisions
AUD$ 104,451
AUD$ 90,586
AUD$ 85, 957
Non-Current Liabilities
Total Borrowings
Bank Loans
AUD$ 419, 919
AUD$ 419, 919
AUD$ 419,591
AUD$ 419, 591
AUD$ 421, 193
AUD$ -
Deferred Income
AUD$ 57,792
AUD$ 62,448
AUD$ 69, 821
Provisions
AUD$ 60, 494
AUD$49, 391
AUD$ 15, 439
According to afr.com the current liabilities of this corporation are, trade and other payables, derivative financial instruments, current tax liabilities and provisions. The Group uses derivative financial instruments in their normal course of business to hedge against exposure to fluctuations in interest and foreign exchange rates. Afr.com in the notes to financial statements details that Bank loans of the Group currently bear an average variable interest rate of 6.66% (2010: 6.97%). It is policy to protect part of the loans from exposure to rising of interest rates in the group's interest rate swap contracts, but based from table above, the group currently does not has bank loans owing therefore no securities pledged in case of a default in payment.
The borrowing payments were started in 2010 at a 6.7% interest rate and completed in 2011 at an interest of 7%. It can therefore be concluded that as of 2012 MYER has no bank loans to pay and have a sound financial position thus qualifying for a $20 million loan because according to afr.com MYER borrowed over $400 million debt funding and has a clean record in payments, therefore can be considered as a good borrower based on its credit worthiness.
DETAILS ON DIFFERENT ITEM OF SECURITY AVAILABLE & LENDING MARGINS
ASSET
2010
2011
2012
Current Asset
Cash and cash equivalents
AUD$ 38, 058
AUD$ 37,274
AUD$105,834
Inventories
Retail inventories
AUD$ 352, 813
AUD$ 381, 261
AUD$385, 702
Trade & Other Receivable
Prepayment
AUD$ 24, 045
AUD$ 4, 131
AUD$ 28, 216
AUD$ 7, 210
AUD$ 17, 712
AUD$ 8, 085
Non-Current Asset
Property, land & equipment
AUD$ 468, 050
AUD$ 535, 139
AUD$515, 482
Derivative financial instruments
AUD$ 549
AUD$ 258
AUD$ -
Deferred Tax Assets
AUD$ 70, 837
AUD$ 47, 380
AUD$ 21, 115
Intangible Assets
AUD$ 922, 020
AUD$ 943,880
AUD$ 936, 149
The above table illustrates the assets of MYER which are available which can be volatilized as security for the loan being sort for. The available assets are cash at bank and cash equivalents, inventories, trade and other receivables obtained from media.corporate-ir.net from a prepared balance sheet of MYER. This corporation also has non-current assets such as property, land and equipment, derivative financial instruments, deferred tax assets as well as intangible assets. The researcher compiled a three year time frame of recordings in order to evaluate the trend and performance of the corporation from the financial year 2010 until 2012. The figures for 2010 and 2011 performance were obtained from Media.corporate-ir.net while for 2012 were derived from afr.com.
Key Strengths & Weakness
Strengths
MYER always have events including the 2011 Spring/Summer Fashion Launch to strengthen their brand awareness to secure their sales (MYER Holdings Limited Annual Report 2011).
The company has changed the financial approach from debt to equity (refer to Appendix 2). This means the company is more secure to be invested in. More potential investors might invest in the company.
The Company applies risk management in a well-defined, integrated framework that promotes awareness of risks and an understanding of the Company's risk tolerances. This enables a systematic approach to risk identification, leverage of any opportunities and provides treatment strategies to manage, transfer and avoid risks (MYER Holdings Limited Annual Report 2011).
Improved technology in the company that increase the efficiency of executing administrative activities in stores. Resulting in larger, more visible transaction centres which staffed at all times during trading hours that improve customer experience (MYER Holdings Limited Annual Report 2011).
MYER's business model is flexible and sustainable. This means it help to manage the volatile of retail trading conditions (MYER Holdings Limited Annual Report 2011).
MYER one loyalty program is a key competitive advantage for the business. This unique program provides special insights into customer shopping preferences and also effective way of communicating with the customers. This means will highly satisfy the customer experience and maintain the customer amount (MYER Holdings Limited Annual Report 2011).
Weakness
The strategy is not diversified and may fail.
Costs to retail businesses are increasing significantly due to higher occupancy costs, higher wage costs and inflation of other outgoing including utility charges. This will affect the profit of the business.
Mitigation: MYER announces job cuts to reduce the cost (Business Spectator 2012).
MYER has the issue facing unprecedented trading environment and weak consumer sentiment which reduced total sales.
Mitigation: MYER should reflect on the issue and come out with a solution.
Taxation change may occur. Any changes in the current rate of company income tax in jurisdiction where MYER operates will impact on the shareholders return.
Customers preferences may change because the revenue are generated from the fashion related products which are subject to rapid and unpredictable changes.
Mitigation: MYER should always improve their market research and maintain the loyal program.
Recommendation
MYER Holdings Limited has delivered a solid result in the year 2011 even under the tough retail environment. However, the sales went down 3.8% and down 5.5% on like-for-like basis in 2011. The net profit after tax also declined by 3.6% in 2011 compare to the previous year. However this slight shrunk in net profit will not be have a huge impact on loan decision.
Based on the data collected (Appendix 2), the current ratio and quick ratio for the company for the last two years have improved. This means the company is able to maintain the improved position for another year and predict they will be maintaining for in the coming future. MYER also still has $37,274 of cash at the end of the year 2011 to meet its short-term obligations. Debtors turnover have also improved which shows the collection efficiency has improved. In short-term liquidity wise, it is favorable as the ratios show that the company is improving. It is an important indicator as to whether MYER is able to meet its interest payments in the short-term but this does not show repayment in the long term period.
As for the long term period, the debt to equity ratio shows an improvement since the company has changed its financing approach from debt to equity. The debt coverage ratio is less than 1 means that the company may not be able to make principle repayments to repay its current debt obligations in the long term. In the year 2010, the company's debt coverage ratio is lower than 1 which is a risky sign. However, in the year 2011, it has improved more than 1 which indicated the company has improved and manage to repay its debt. In the long term, this company will have ability to repay its loan since the company is making profit. Therefore it is also a favorable in a long term in repayments of loans.
Even though, there might be chances of getting default, MYER possesses a security of (AUD$ 369,392,600) and is greater than the $20million loan being proposed. Based on this lending criterion it would be concluded that it should be given the loan but there are also other areas of lending to be assessed before concluding and giving out the loan, because the figure in Appendix 1 provides a second way out of paying the loan.
In overall, MYER is favourable in applying this loan proposal of $20 million. There are evident shows that MYER is capable to repay the loan with interest with the good financial position and strong business performance. With all these in mind I think that our Bank would be prepared to take the level of risk that lending to this company.
