Myer (MYR, $3.64) Buy

By Jason Fittler

We expect Myer's share price to benefit from three key levers:

1) Positive earnings momentum from strategic growth projects;
2) Desired exposure to a retail upswing; and
3) A re-rating to reflect stronger growth.

Overall, MYR remains one of our high conviction calls.

MYR delivered a reasonable sales result in what was a challenging environment, but the company also expanded the operating margin to deliver 2010 EBIT guidance above the proforma target of A$261m, at a
range of A$265m-272m.

Management provided a positive view on the outlook, with expectations of solid Christmas trading.

Underlying margin expansion appears to have accelerated factoring the top end of upgraded guidance, Myer has expanded its EBIT margin above 92bp of growth in first half 2011.

Myer attributed the margin expansion to a positive mix-shift towards ‘exclusive brands’, better buying opportunities and lower shrinkage; all contributors to a stronger GP margin result.

Given the high levels of discounting the underlying improvement to the margin appears notable.

We see three levers for share price growth in the medium term, including:

1) strategic growth projects (including CCTV, PoS and new stores);
2) exposure to a cyclical upswing in retail sales (which Myer’s high fixed-cost base and gearing supports); and
3) a PE re-rating.

We maintain our Buy call and raise our target price to A$4.36 to reflect earnings upgrades for FY11 by 4.6% (to A$195m) and for FY12 by 4.1% (to A$215m).

To invest in Myer please call us on 07 4771 4577.