The Principal Areas of Judgment in Myers Finance Essay

Myer is a large department stores in Australia. Its parent company is NB Flinders PTY Ltd which is the Australian parent company of the Myer group of companies. There was an economic recession in 2007 until 2009 as a result of subprime crisis. As a consequence of this it had impact on Myer performance as well. Myer group revenue decreased in 2008 and 2009 after Lehman Brother went bankrupt. Although, Myer has experience management team which manage quite well despite there were a decline in sales revenue in 2008 and 2009 ,but there were increase in net profit in 2008 and 2009 . In 2009 net profit rose by 10% from 93 million in 2008. Another evidence of good management is high inventory turnover which contribute to a true profit margin and high account receivable turnover. On the other hand, Myers utilizes high gearing to generate income but Myer has a good potential to pay back interest as interest coverage ratio were above 2 times and operating cash flow were positive in 2008 and 2009.

Principal Areas

The main principal is the basis of preparation of financial statements , principal of recognition ,revenue recognition, impairment of assets etc .Also, derivative and hedging policies are important as well. These policies are used to recognized revenue profit and loss in Myer's financial statement which have an impact on Myer's performance. Therefore, it is considered to be the principal areas of judgment. Myer had a good liquidity despite current ratio was just around 0.8 times since 2008 .This was because it had a high numbers of trade and other payable around 495,407 million in 2009 which increased from 489,387 in 2008. However, trade and other payable had no interest obligation which implied that the higher trade and other payable the better it was because Myer will have more cash flow due to less require working capital. Quick ratio also assess the deeper liquidity as it only included cash, market securities and account receivable but no inventory. This was due to inventory can be a dead stock if inventory can not be sold. According to the quick ratio below 1 was no good. The quick ratio went up from 0.29 times in 2008 to 0.38 times in 2009. Low quick ratio as a result of high current liabilities , especially in trade and other payables.

Solvency

Debt to Equity measures how much Myer utilized gearing compare to its equity. It tells about the financial status of Myers. Usually the acceptable ratio is around 2 times, however in retail sectors can be allowed to 3-4 times as a result of high credit term from suppliers . In 2009 debt to equity ratio was 5.97 times which decreased from 7.85 times which was around 24 % as a result of higher retain earnings in total equity. Interest coverage is calculated by EBIT/Interest. It tells about the Myer's potential to pay interest . The higher the better it is. There was increased in interest coverage ratio in 2009 as interest coverage rose from 1.65 in 2008 to 1.8 in 2009 and This was due to there were an increased in EBIT in 2009 while interest paid remained constant.

Asset Utilization

The big picture of asset utilization is how effective Myers use asset to generate income. Account Receivable Turnover measures how Myer can manage account receivable .It implies the credit term and cash cycle as the account receivable turnover should be less than account payable turnover ,because the Myer should receive a long credit term from supplier ,while give a shorter credit term to account receivable ,so Myer can have more cash flow as a result of lower working capital. Account receivable fluctuated from 2008 to 2009 . Despite there were a fluctuation but the account receivable turnover were so high .Therefore should not have a significant implication. Although, the average collection period days is the number of days that Myer receive payment from account receivable. There was a worsen in collection period from 4.06 days in 2008 to 5.11 days in 2009.A high account receivable turnover will result in a short collection period days ,where as a low account receivable turnover will result in a longer collection period days. On the other hand, an inventory turnover assess how Myer can manage inventory and sell products. It demonstrates how many times inventory is sold and replaced with new inventory. The higher inventory turn over the better it is for Myer. This is due to 2 main reasons First of all, high inventory contributes to high true profit margin especially in retails sectors such as Myers because most of businesses in retail sector have a small net profit margin while they need to have a large volume of sales. Therefore , the higher inventory turnover multiplied by net profit margin give a true profit margin for Myer. To demonstrate this. In 2009 Myer net profit margin was 3.7 times while an inventory turnover was 7.87 time .Hence, a true profit margin was 7.87 * 3.7 = 29 % not 3.64% as it appeared. Secondly, high inventory turnover enhances Myer's cash flow and lower dead stock risks. There are risks associate with stock like dead stock when inventory can not be sold due to out of fashion or change in technology or cheaper substitute in the market. Myer's inventory turnover remained constant around 8 times as cost of good sold rose more than inventory. Conversely, there was a slight decreased by 6.3% in 2009 as a result of economic recession. But Myer managed Inventory quite well as it was still high at range between 7 and 8% . Fixed Asset Turnover assess how Myer manage property plant and equipments to generate income. It fluctuated from 2008 to 2009. Although, assets turnover decreased as a result of a decline in sales revenue between 2008 and 2009, while property plant and equipments remained constant. As a consequence of this the ratio went down dramatically from 9.83 times in 2008 to 7.53 times in 2009 In addition it is a result of economic recession as well. Total Asset Turnover measures how effective Myer can manage all resources to generate income. Due to total assets consists of property plant and equipment as well. So, the ratio were much smaller than fixed asset turnover. However, the total asset turnover were 1.3 to 1.6 times implied that Myer could utilized total asset to generate income quite well.

Income Statements Analysis

Profitability

The company performance is measured by profitability and net earnings. Therefore, the essential profitability ratio that give a big picture of Myer performance are Net Profit Margin, ROE, ROA, and Net Profit. To begin with net profit margin. There was an in increased in net profit margin in 2009 as a result of a rise in net profit by 10% in 2009 ,where as sales went down from 2.9 billion in 2008 to 2.8 billion in 2009 which enhanced net profit margin. Return on Equity assess how much Myer can use investors' capital to generate returns. Usually ROE is correlated with net profit , if net profit increase it will enhance a higher ROE . However, a dramatic increased in retain earnings from 149 million in 2008 to 250 million in 2009 which grew up by 68% could have an impact on ROE .Therefore , ROE decreased from 45 % in 2008 to 36 % in 2009. To increase ROE Myer needs to have much net profit growth than retain earnings. Where a ROA assess how effective Myer can utilizes total assets to generate net profit. Ordinary ROA is lower than ROW due to assets consists of debt and equity. Despite, ROA was below 10% in 2009 but still acceptable and expect to recover when economic recover in second half of 2009 and beyond. There was an increase in net profit by 10% in 2009 as a result of decreased in cost of good sold in 2009 from 1.7 billion in 2008 to 1.6 billion in 2009.

Should Myer be compared to another company?

Myer should be compared with companies in the same industry. This is to measure Myer's performance to an industry average

Who are their main competitors?

Myer is a large business , so should be compare with same size rival. This is like a heavy weight boxer. And it is David Jones a large department stores.

How many years should trend analysis be done for?

Trend analysis should be done not more than 5 years due to it is more accurate and precise. Beyond 5 years is too hard to predict unless the sales reach maturity stage and anticipate to grow at a rate of inflation. Also, marketing and investment plan can change dramatically. However, there are many investments and incidents can happen beyond 5 years. Therefore, it is appropriate to analyze for 5 years. To avoid errors beyond 5 years should assume sales and earnings growth at inflation rate.

Short Overall Analysis

Provide a short overall analysis for shareholders on whether they should maintain, increase or reduce their investment.

Who are Myer?

Myer Holdings Limited (MYR) is one of Australia's largest department store groups targeting a wide spectrum of consumers. The company has a national network of 65 stores in Australia. Myer retails designer, national, and international fashion and apparel for men, women, and children, and operates a consumer loyalty program. The company focuses on its retail presence and execution, with a mix of house-brand and leased retail space areas. Products/services:  Myer's offering comprises 600,000 products across 11 core product categories: womenwear, menswear, youth fashion, childrenswear, intimate apparel, beauty, fragrance and cosmetics, homewares, electrical goods, toys, fashion accessories and general merchandise. Myer is looking into further margin expansions and sales growth through specific strategies including opening 15 new stores in the next five years with 12 conditional agreements for lease already signed, rebuilding and refurbishing the Melbourne flagship store, continuing to grow the MYER one loyalty program and roll-out a new point-of-sale system and introducing new product categories, brands and concepts to improve sales growth and margins. The company also installed a new Point-of-Sale system while it was being restructured under private-equity ownership. Myer's growth strategy focuses on four areas: comparable store sales growth, new store expansion, gross margin improvement, and reduction of cost

Who are they owned by?

NB Flinders Pty Ltd is the Australian parent company of the Myer group of companies.

Is there any current discussion on Myer in the media that might give some value to your analysis?

Not at the moment.

Recommendation

From long term investment perspective, recommend to increase investment in Myer as expect Myer performance to recover and to grow in year 2010 and beyond when economic recover. Secondly, despite there was an economic recession in 2008 but Myer ROE and Inventory Turnover still high which are evidenced of Myers good management. Therefore, when economic recover and people purchasing power increase anticipate Myer's earnings to boost .As a result of increase earnings Myer's intrinsic value will increase and share price should reflect intrinsic value when there is an earnings surprise announcement.

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