Business Operations Of Myer Holdings Limited

Myer Holdings Limited possesses 66 stores across the Australia, being Australia’s largest non-discount department store chain. Myer provides customers a broad range of product categories and a wide selection of domestic and international brands at multiple price points. To maintain the dominance in the market, Myer has signed 14 lease agreements for new stores, redeveloped Melbourne flagship store to an international class standard; expand MYER one loyalty program, together with installation of a new point-of -sale system. On 2nd November 2009, Myer was listed on the Australian Securities Exchange (ASX) after an initial public offering.

Business Operation

Nature of revenue resources

Sales revenue grows up 0.7% [1] to $332.24 million in FY2010 [2] . As shown in the Figure 1, 3.7 million MYER one members contribute 68% of sales. It is potential to grow top-line sales through existing and new members. Myer also generates more revenue predominantly through interest charges and annual fees, as 35,600 new Myer Visa cards signed up in FY2010. Total MYER one Gold card holders are now in excess of 20,000, who spend more than $7,500 per annum.

Underlying earnings were supported by better margins from its growing line of exclusive brands, now accounting for 17 % of its business [3] .

Concession operator sales are $103,712,000 for FY2010, which is made from providing store space for well-established brands, comprising of payments for floor space and/or a percentage of gross sales.

Myer’s corporate and wedding services are another revenue streams. Myer Gifts and Myer’s online sales channel further support merchandising revenue, being anticipated to have a larger presence in the next 5 years.

Conduct of Operations

Myer is the largest multi-category department store chain in Australia. In order to stand out in the competitive industry, Myer employed a strong, clear growth strategy which is built on four key pillars: comparable store sales, gross margin improvement, new store opening and reductions in the cost. According to the financial annual reports, earnings before interest and tax (EBIT) increased significantly from $165 million to $236 million since 2007 and keep growing to between $265 million to $272 million in 2010. Myer’s vision of being an international class retail business has set up an iconic and reputable brand, together with Myer Loyalty program to retain and expand customer base in order to increase sales. Myer has opened 65 stores in prime retail locations in Australia and Bernie Brookes, and 14 new stores are planned to open over the next four years. Myer utilizes new store rollout to achieve a larger scale business. Chief Executive Officer points out that the investment in the implementation of CCTV is completed which is anticipated to reduce losses from theft. Myer also establish a new POS system to generate productivity and customer services improvements. Improve markdown management which is expected to be done by smart allocation of products and better sourcing is developed in order to reduce the operation costs and achieve a rising gross margin.

Products& services and markets

Myer operates a consumer loyalty program and offers a large number of Australian households more than 600,000 product lines, comprising 2,400 brands sourced from over 800 international suppliers. Myer’s product consist of eleven core categories: womenswear, menswear, youth fashion, childrenswear, intimate apparel, beauty, fragrance and cosmetics, homewares, electrical goods, toys, fashion accessories, and general merchandise. Products are sold across a number of markets defined by their price points: Permanent Value, Attainable Fashion, Inspired Designs, Affordable Luxury and Premium Luxury, ensuring depth of range and broad customer appeal.

Myer has a suite of services to support its business, partnering with Visa and QBE to provide credit facilities, such as the Myer Visa card and comprehensive MYER Insurance coverage for customers. There has also been focus on the expansion of Myer’s online store presence, gift cards, corporate services and bridal and gift registries in 2009, Myer entered a partnership with Red Balloon, Australia’s leading supplier of experiential gifts to further develop its gift registry business.

Industry Conditions:

Market and Competition

Myer is Australia’s largest non-discount department store chain in retail industry. Supplies are vital to department stores’ success, with department stores clamouring to secure exclusive supplier agreements with popular brands. Regardless of increasing bargaining power of suppliers and lower switching costs, increasing entry barriers to this industry as a result of expansion of existing players, strong brand loyalty, high capital costs and high acquisition costs [4] have ensured the competitive environment remains high, yet steady.

Despite the main rival, David Jones, Myer also competes with specialty stores, especially footwear and apparel, and discount department stores such as Target, Big W, and Kmart. Pharmacies present significant competition in fragrances and cosmetics.

Regulatory Environment

The Board of Myer Holdings Limited adopts corporate governance to improve performance of managers and employees to be consistent with shareholders’ expectations. The Myer’s code also provides legal guidelines of conducts and behaviours which must aware and comply with laws and regulations relevant to Myer’s operations, including occupational health and safety, fair-trading and dealing, privacy and employment practices. Considering of commercial leases is needed to open a new shopping centre, signing contracts and agreements require compliances with retail tenancy legislation. Additionally, Myer Holdings Limited needs to comply with the Corporations law which is established to provide rules and responsibilities to stakeholders. As Myer Holdings Limited is listed on the ASX, it is also required continuous and transparent disclosure of its financial reports and any significant events and transactions. Moreover, Myer should follow the Trade Practices Act supported by the Australian Competition and Consumer Commission (ACCC) with aim of protecting customer rights. Breaching this can be fined severely by Federal Court.

PEST Analysis:

Political

In general Australia has a stable political environment and relatively low political risk. The Government is implementing economic reforms to strengthen and secure the economy. This will ensure Australia is well positioned to fully benefit from the opportunities created by strong growth in our region, and ensuring that all Australians share in the benefits of a strong economy [5] .

The government is achieving this by means of closer relationships with emerging economies such as China, free trade agreements with China, Japan and Korea are currently under negotiation, and the Australian government has signed free trade agreements with New Zealand, Singapore and the United States [6] as Myer offers its customer both local and global brands by importing from all over the world. These free trade agreements assist Myer to achieve cost efficiency in its supply chain, however the potential conflict between Australian Standards and other countries’ standards for a same product may exists and affect Myer’s supply of these products to its customers.

From 1 July 2010, “the low income tax offset will increase from $1350 to $1500, the 30% threshold will increase from $35000 to $37000 and the 38% marginal tax rate will decrease to 37% [7] “. Tax cuts will increase household’s disposable income which could motivate more expenditure. Myer will potentially benefit from the increasing of household expenditure.

Economic

Due to the Global financial crisis, Australia economic contracts in 2009, negatively impacting the retail industry and thereby generated an unfavourable environment for Myer. However, the Australian economy had rebounded fairly well. The unemployment rate decreased 0.2 percentage points over August 2010. Moreover, the seasonally adjusted GDP growth rate change from Jun quarter 2009 to Jun quarter 2010 is +3.3% [8] . These will enhance the consumer confidence and potentially increase the sales of Myer.

Additionally, the consumer price index indicates that the level of inflation has decreased throughout the year (Mar 09 is 3.9, Dec 09 is 3.1, and Jun 10 is 2.7). It may be beneficial to Myer as rising purchasing power of consumers can increase consumption on products offered by Myer. Furthermore, the Australian dollar has appreciated substantially during the year. Myer can take advantage of it since the imported products are cheaper than before.

On the other hand, according to the statistic from RBA, it is the fact that RBA has increased the cash rate 6 times for each time being 0.25% since 7 October 2009. The increase of the cash rate leads to a significant amount of interest Myer has to cover.

Social

Australia is an immigration country with a pluralistic society. “In the 2006 Australian census, the most commonly nominated ancestry was Australian (37.13%) followed by English (31.65%), Irish (9.08%), Scottish (7.56%), Italian (4.29%), German (4.09%), Chinese (3.37%), and Greek (1.84%).” [9] With the diversity in culture and background, the whole society has a positive attitude of welcoming foreign products and services. This is favourable to Myer since Myer provides international-brand products to its customers.

Australia has a population of 22 million and centralized around the coasts as shown in Figure2. “The geographic distribution of the Myer’s store portfolio is in line with Australia’s geographic population distribution, with the majority of stores located in the more densely populated eastern seaboard states [10] .”

Figure 2: Population density, Australia- June 2009 [11] 

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The Australian society promotes equality between men and women as both genders plays a critical role in the development of the society. Family and leisure are also valuable to Australians. Myer’s core offering include women’s wear, men’s wear, child’s wear and home wares, and a fun shopping experience is promoted to encourage shopper to visit the department store on leisure time.

Furthermore, social responsibility, sustainable development and green issues are praise highly in the Australian society. Myer takes its social responsibility through its community initiatives including donations to natural disasters such as the Victoria’s bushfire in 2009 and to cancer foundations. Supports of local community events are enhanced by Myer’s local area marketing program. [12] 

Technical

Technology development in e-commerce has enabled electronically commercial transactions. Substantial business opportunities are presented by new technology, online direct marketing and online shopping that enables Myer to reach to a wide range of customers and provides customers convenience and quick responses. However, the increase of online shopping could negatively impact on sales of Myer as customers may purchase merchandises from other online sellers, such as sellers on EBay.

Furthermore, information technology system enables company to integrate information across operations and different functional areas of the company, facilitates business process and improves efficiency. For instance, Myer operates merchandising system, MyMerch, on daily basis to deliver the service in the most efficient way. The new PoS and CCTV systems are introduced into Myer’s stores as well [13] . Although new ways of doing business may cause inconvenience or risks to department store shopping at the early stage, technology allows stores to conduct business processes more efficiently and maintain the competitive advantages.

Critical Business Risk and Implication:

Key Audit Risk: Overstate value of inventory

Key Account at risk: Inventory

Myer captures around 3.5 million customer visits per week in 2009, failure of its key information technology system such as CCTV results in an increase in the losses from theft. Due to the limitation amounts of attendants, it will pose an audit risk which will affect existence of inventory account.

A great percentage of Myer’s revenue is related with fashion related products which keeps changing rapidly as customer preference is unpredictable. Myer’s product mixes do not match customer preference can leads to growing amount of the slow-moving, obsolete items in stock. In addition, Myer use MyMerch as its inventory management system. The function of this system also influent the efficiency of logistics. All this factors will have a significant influence on valuation and allocation of inventory account.

Financial reports of Myer shows its inventory turnovers slightly declined from 4.0 in 2008 to 3.8 of current year. Considering of sales increased 0.7% since 2008, there may be risks of misstatement in inventory account.

Key audit risk: Undervalued of interest expense

Account at risk: finance costs

The table above shows that RBA has increased cash rate from 3.00% to 4.5% since 8 Apr 2009, as the serious economic contraction in Australia has passed, and the Australian government willing to achieve an inflation rate of 2-3%.

According to Myer’s financial report 2010, Myer has $118million capital expenditure invested [14] ; Myer has also dropped plans for fourteen stores which expected to open over the next four years. It is expected that 22% of capital will be financed using debt. The interest rate changing is essential to Myer, as finance cost is significant. In fact, the finance cost decreases from $87,626,000 to $44,570,000 [15] as the borrowing decrease from $879,005,000 to $419,919,000. Both of the account figure dropped about 50%. That draws attention to the possibility that Myer misstate this account since interest rate has increased significantly. It poses an audit risk which can affect the completeness, accuracy and cut off of finance expense.

Key Audit Risk: Overstatement of current year revenue

Key Account at risk: Sales Revenue

Key assertion at risk: Occurrence & Accuracy

The sales revenue increased from A$2,798,916,000 to A$2,825,034,000. Simultaneously, cash decreased from A$184,773,000 to A$105,834,000 with trade and other receivables decreased from A$32,897,000 to A$24,045,000. Myers introduces a variety of incentive and bonus programs to the management to improve sales and productivity across all levels and areas of the business. Managements have the incentive to meet the forecasted sales growth disclosed in the prospectus since 2010 is their first FY after listing. Hence, the audit risk relating to the inaccurate evaluation of sales revenue is relatively high. Occurrence and accuracy are considered as major assertions at risk of sales revenue account. Recorded sales invoice and order invoice should be carefully verified to the inventory documents and delivery documents. Nevertheless, cash decreases may due to the purchase of PPE, which increased from A$371,699 million to A$468,050 million.

Key Audit Risk: Material error of overstate or understate Accounts Payable amount due to the fluctuation of exchange rate

Key Account at risk: Trade payables

Key assertion at risk: valuation and allocation

Australia currently has a floating exchange rate system and as shown in the graph above the exchange rate is continuous fluctuating.

“Myer sources its merchandise from over 800 suppliers globally to provide customers with one of the broadest brand offerings by a single retailer in Australia.” When Myer imports on credit with a foreign currency, the final payment will be different to the initial recognised amount due to the fluctuation of exchange rate, therefore the trade payable account is either understate or overstate and the valuation and allocation assertion is at the priority position that needs to be examined.

The trade payable account decrease from $224,471,000 in 2009 to $216,588,000 in 2010, this might be a result of the high value of Australian Dollar, however with the rapidly expansion of opening new stores, it is expected Myer to purchase more and has a higher amount of trade payable, thus a potential audit risk exists.

Key Audit Risk: Valuation of the existing PP&E

Key Account at risk: Non-current assets: property, plant and equipment

Key assertion at risk: Valuation and Allocation

For Myer, plant and equipment is stated at cost less depreciation. Myer is now operating 66, and on track to open another 14 new stores by 2014 with scope to grow beyond 80 stores supported by their existing supply chain. It is predictable that the depreciation expenses should increase with the additional depreciable assets. As it is shown in the 09-10 report, the PP&E increased from A$371,699,000 to A$468,050,000 in FY2010, whereas, the depreciation of non-current assets – PP&E expenses decrease from A$47,200,000 to A$41,888,000 in FY10. For these reasons, it might be possible for Myer overstating its PP&E account by using off balance sheet account and/or changing depreciation method. It needs more substantive tests in auditing process.

Effects of listing on ASX

With listing on the ASX, more regulations are imposed on Myer, such as higher standard of disclosures. Myer’s shareholders would expect a better performance which is reflected by share price and directly related to the dividend. Myer should enhance its performance to maintain at or above certain level, otherwise it will breach of the continuing listing rules of ASX. These would probably place heavy burden on management, hence there is high possibility to deliberately manipulate the accounting numbers to meet the expectations of shareholders and forecasted profits. Therefore, the risks associated with conducting audit of Myer’s financial statements increases. In order to present the true and fair financial performances and positions of Myer, some issues need to be concerned when preparing audit plan.

It is important to make sure the consistency in financial statement throughout the entity. The depreciation and amortization methods must be consistent with previous years. For instance, Myer has been using the straight line depreciation for years; it should be still applied when calculating the depreciation expenses.

Moreover, it is necessary to set a lower materiality threshold than previous years due to the higher audit risk. Myer as a publicly listed company, the materiality will be set at 5%-10% of the net profit after tax. However, the managers are motivated to do some creative accounting, that is to manipulate the figures to make the annual statements more attractive to existing and potential investors, involving reporting a higher profit through window dressing revenue and expenses. Therefore, revenues and expenses accounts should be carefully investigated. More substantive testing, particularly tests of details on occurrence, completeness and accuracy and for those accounts need to be employed to ensure that revenues and expenses actually occurred in 2010 truly exist and are recorded appropriately.

Furthermore, based on the 2010 Myer’s annual report, Myer has a total liability over 1 billion. It is likely that managers hide some liabilities to make annual statement more attractive. It is important to test the completeness and valuation and allocation of liability account in details.