A profit downgrade is bad news at the best of times, but in the midst of a turnaround it's especially bad news and is causing investors to ask whether the turnaround strategy is on track.
Myer shares fell just under 10 per cent on Thursday and have now fallen 47 per cent since the start of the year.
It's just the latest bit of bad news for investors in this beleaguered retail chain, which has suffered several profit downgrades over the past couple of years. The shares fell on the first day they listed at A$4.10 and have pretty much kept falling ever since. At A73.5 cents, they hit a new low before bouncing a little on Friday.
The profit downgrade was accompanied by the departure of deputy chief executive Daniel Bracken, who filled the two key retail roles of chief merchandise officer and chief customer officer. Given that he was one of the chief architects of the strategy, his departure raises questions about where to from here for Myer.
The Myer strategy, which the company has named New Myer, eschews discount in order to protect profit margins, uses "special events" to draw customers into the shops and features more name brand clothing than Myer's own brands. Promotions include a sale based around the Spring Carnival horse races and sponsoring the latest tour of Katy Perry.
But in a setback for brand-driven strategy, two of its key brands are in trouble. UK clothing brand Topshop was supposed to attract younger shoppers to the stores, but Myer will soon stop stocking the brand after its Australian arm collapsed. Myer's fully-owned Sass & Bide brand, which makes upmarket women's clothes, has performed so poorly that Myer is writing down its value by A$39m.
The profit warning was due to poor sales in the crucial June-July midyear sales period, which Citigroup estimates generate 17 per cent of department store revenue.
Sales were apparently going well until the end of June when they plunged, with the company blaming concern among consumers about rising house prices and increasing household debt, as well as fatigue after years of deep discounting in the broader retail sector.
Despite the profit downgrade and doubts about the turnaround strategy, Umbers is sticking to the plan, stating that he has no intention of returning to discounting.
"This year we have executed a number of new initiatives to engage our customers, drive foot traffic to our stores and increase average transaction value. These initiatives have delivered positive results and have provided some mitigation against volatile and challenging trading conditions," Umbers said.
"We are responding to the challenging external environment in a way that preserves the integrity of the New Myer strategy that is built around customer service, engaging retail experiences and wanted brands, while continuing our focus on efficiency and productivity."
In fairness, Myer has been operating in a difficult retail environment, particularly for discretionary retailers. We have seen a spate of fashion retailer collapses in the past few months, including chains such as Herringbone, Rhodes & Beckett, and the local Topshop franchises.
This is the crux of its problems. Other retailers are slashing prices to get shoppers through the doors and boost revenue, and in that environment it's extremely difficult for Myer to compete.
It's all very well preserving margins, but if sales aren't growing then the strategy isn't working.
Umbers has no choice, really, than to persist with New Myer, given he was one of its chief architects.
In some respects he is to be congratulated for this. The company is undoubtedly coming under a lot of pressure from investors and particularly fund managers who want their quarterly returns to look good. It would be very easy for Umbers to give in and slash prices to get customers through the doors.
The resulting sales boost would help Myer's profits in the short-term and mollify fund managers, but only for a little while. Discounting is no way to build a sustainable business.
This is truer than ever now that Amazon is about to enter the Australian market. Many retailers won't be able to compete on price, so Myer's premium brand event-driven strategy makes sense.
As always, execution is the tough part.
If New Myer doesn't work there's always Myer 2.0, though Umbers won't be around to design it.
