2. Prospective Analysis
Explanation of Forecast Assumptions
Myer decided to change their business strategy due to the poor performance in the prior years (appendix A). First, they are planning to focus on customer satisfaction by investing more than $600 million for capital and the implementation costs of the new strategy (Myer Holdings Limited 2015). Second, they are expanding the range of their brands and focusing on the big and well-known names such as Calvin Klein and Nine West to achieve the new strategy (Low 2016). Third, they are planning to invest more in omni-channel capability and they already took the first step when they joined eBay this year (Mitchell 2016). Finally, they are planning to expand their market internationally to gain more customers. So, if Myer can implement these new strategies and improvement smoothly, they will be profitable in the following years and become more competitive in the market. The following analysis represents the best estimate of Myer’s future performance.
By changing the business strategy and expanding the range of their brands, Myer can increase revenue in the future, because it generates revenue from sales of goods. In addition, experts are predicting that economy growth will increase up to 2.8% as a result of the monetary policies implemented by the Reserve Bank of Australia. Appendix B shows the economy growth forecast for the period 2016-2019. Furthermore, economists forecasting that inflation rate will start to rise by the end of 2016 to reach 2.9%, in the range of RBA’s target inflation rate, as GDP is expected to increase this year up to 2.8% (Oxford Economics 2016). Thus the sales growth rate is expected to be 2.10% in 2016 and it will keep increasing over the years to reach 3.80% in 2020, which means sales are expected to grow from the current amount that is $2,785,882 to $3,241,913.51
ATO is expected to be stable at 212.84% over the next five years and NOA will increase from $1,293,737 to $1,523,178.55, due to the implementation of the new business strategies and the improvement of the stores productivity, which is the strongest asset for Myer because it delivers great value to the firm (Myer Holdings Limited 2015).
PM and Dividend Payout
Due to the increase of competitive pressure in the Australian retail industry, the changes in strategies and accounting policies that have been described previously, PM is expected to be stable at 2.09% while NOPAT will increase from $57,380 to $67,756. As a result of the increasing NOPAT, net dividend payout is expected to be 25% and increase from $14,862 to reach $16,939 over the period 2016-2020.
Cost of Debt After Tax
Interest rate is predicted to remain at 2% because Reserve Bank of Australia is trying to help to expand the economy (appendix C). The high interest rate means Myers will have to borrow money from financial institutions in order to expand the business. However, a low interest rate can provide a good chance for Myer to expand their business. So, because the interest rate is going to be stable, cost of debt after tax is also expected to be stable at 4.24% over the period 2016-2020, which means cost of debt will increase from $18,249.99 to $20,947.80. As a result, the closing debt will change from $447,053 to $520,285. While Myer’s leverage will be stable at 33% until 2019 it will increase slightly to reach 34%.
Comprehensive Income and Equity
As a result of the changes in NOPAT and NFEAT, comprehensive income will rise from $41,197.66 to $46,808.19. Lastly, equity will increase from $889,352 to $1,002,893, because of the increasing in Myer’s assets and liabilities.
This sensitivity testing is based on Residual Operating Income Model. It works by changing the forecast rates to test how sensitive Myer’s share price is to the six forecast and cost of capital assumptions. As given above RIMO base price is $2.43 and trading price is $1.15. If sales growth rate increases by 5 more percent, share price will increase to $2.63, but if Myer did not implement the new strategies and improvements smoothly, sales will decrease by 1.3% and share price will reach $2.38. While PM will change dramatically, if it increases by 2% the share price will rise to $3.24 and if it decrease by the same amount, the share price will fall to $1.52, which is predicted to be the lowest share price.
One of the reasons of this change would be the increase of competition pressure in the Australian retail industry. On the other hand, if Myer’s ATO rise by 50% it, the share price will be almost the same, but if they did not use their assets efficiently and it decreases by 50%, share price will be $2.45 which means ATO will not be affected that much. However, if cost of capital increase by 2%, share price will be $2.28, but if it decreases by the same amount it will be $2.63. Lastly, the sensitive testing shows that share price will be the same under dividend yield and Eiat. The changes in theses two factors will not impact the share price, because dividend yield and Eiat are financing items and do not affect value.
3. Application Recommendation
It is recommended to buy in Myer because based on table 2, the trading price is $1.15 and it valued at $2.4, and the most pessimistic price is $1.5 which means it is not expected to go lower than that. Myer is going to make some changes and improvements in business strategies, expanding the range of their brands and investing more in omni-channel capability. So it is expected these changes will affect the value positively. Therefore as a shareholder in Myer, there is a strong confidence for a return on investment. Management Consulting The sensitivity testing shows that profit margin has changed dramatically, which means Myer is more sensitive to profit margin (table 2). Myer’s 2016 half-year result showed that sales grew by 5.6% dues to the implementation of the new business strategies and development. Myer is expected to be profitable in the upcoming years as long as they deliver the strategies smoothly, become more competitive in the market, and focus more on customer service. Sustainability
In order to have a sustainable business, Myer have to invest more in capital to improve service and productivity, utilise their customer data, improve online shopping and their product mix over the next five years, and become more price competitive. Management has to be creative when designing the strategies and be more optimistic for a sustainable firm. Myer should improve Myer One loyalty program, because the program has more than 5 million members which is a huge number they can easily benefit from these customers by keeping them loyal, satisfied and giving them more benefits which in return can benefit the business.
As a result of keeping the customers loyal, the bargaining power will be low. Myer can generate a huge amount of data from their loyalty program, which would give them insight into who are the real customers, what type of brands they are buying more, and what they really want. And then they can continue expanding the range of their brands based on that and focus on the more profitable brand names to attract customers back. In addition, they can use surveys to ask their customers about their favourite international brands that they can bring to Australia.
However, there have been some concerns that Myer is not investing enough money into number of labels, which can rub off on the wider department store brand. So for Myer’s best interest they have to keep their brands visible and fresh, focus on new well-known brands. Myer made a good decision when they acquired 25 per cent stake in the Topshop Australian franchise last year. So in order to be more profitable, they should roll out Topshop products in Myer stores, which will improve their target management and attract more young shoppers. In the other hand, Myer should make more improvement to their long-suffering investors.
Competitions and Retail Industry
Competitions in retail industry have been increasing over the years, as retail industry become globalize and more international competitors are coming to Australia. Myer has to develop strategies to remain a head of others in the market, because if Myer do not then it will be hard for them to find growth in the financial performance. In order to achieve productivity gains and continue on competing in the industry, Myer needs to shut down as many as 15 stores. This move will enable them to improve and maintain competitive position and return Myer to sustainable profit growth in the future.
Risks associated with the changes in the industry include the changes in consumer’s shopping behaviour and the improvement in technology. Myer has been slow to embrace the opportunity of online shopping, which hurt their sales in past years. Online retailing is becoming more influential both as a research tool and as a portal to buying. Myer has to keep up with these changes and improve their website, Click & Collect system, delivery time and supply chain efficiencies, and visual merchandising to give customers a better and easier shopping experience or else their financial outlook going to be at risk. In the other hand, Myer also have to improve in-store service by better utilising rosters, shift focus to in-store events, increase training staff and making the most of their talents, which can improve the stores visitors’ experience.