AUSTRALIA：RETAIL：DEPARTMENTSTORES：MYRANDDJSLAGGINGOFFSHOREPEERS;STEPUPINCAPEXPROFILE1130.ppt

Sell,November 15,2012Australia:Retail:Department StoresEquity ResearchMYR and DJS lagging offshore peers;Step-up in capex profileAustralian retailers online sales lag offshore peers,Its been well documented that Australian department stores have been,VALUATION TABLE SUMMARY,relatively slow to migrate to online offerings,with online sales currentlyaccounting for c.1%of total sales.In contrast,US/UK department storesgenerate c.10%of their total sales from online operations.Impacted by lower cash allocation towards capexWe believe a key contributor to the slow migration of Australian,StockWesfarmersBillabong InternationalMetcashPacific BrandsJB Hi-FiCoca-Cola AmatilTreasury Wine EstatesWoolworthsGoodman FielderMyerHarvey Norman,TickerWES.AXBBG.AXMTS.AXPBG.AXJBH.AXCCL.AXTWE.AXWOW.AXGFF.AXMYR.AXHVN.AX,Price15-Nov33.800.773.420.6010.4613.154.9028.270.572.131.78,RatingBuyNeutralNeutralNeutralNeutralNeutralNeutralNeutralNeutralNeutralSell,12-monthTarget Price42.210.933.620.6010.6413.545.0128.220.572.071.64,TotalReturn30%21%14%9%8%7%5%5%5%4%-2%,department stores to the online channel is the amount of investment madeinto technology/online capability.US and UK department store peers,David Jones DJS.AX 2.51Source:IRESS,Goldman Sachs Research estimates.*Wesfarmers is on the Conviction list.,1.88,-19%,allocated a significantly larger portion of their cash towards capital,expenditure.One key reason for the more limited investment from theAustralian department stores has been the focus on maintaining strongdividend payout ratios,given the large weighting towards individual retailshareholders and the tax advantages from fully franked dividends.Implications for Australian department storesOffshore department stores are targeting Australian consumers via theironline stores.With US and UK department stores now as competitors,webelieve the Australian department stores will need to increase theirinvestment in the online space.As a result,we have revised our forecasts for DJS and MYR to incorporatea higher level of capital expenditure funded by a lower dividend payoutratio.Given MYRs higher level of investment in this area over the last 5years,we have assumed DJS requires a relatively larger step-up in capitalexpenditure.The overall impact on our FY13E/FY14E/FY15E EPS forecastsare:DJS-3%/-7%/-10%and MYR-1%/-1%/-3%.Furthermore,our DCFvaluations for DJS(Sell)and MYR(Neutral)have fallen 12%and 7%,respectively,while our 12mth P/E-based target prices fall by 3%and 1%.We retain our cautious view on domestic discretionary retailersWe retain our cautious view on domestic discretionary retailers.Consumerspending seems to be stabilizing with some segments better,but generallystill remains tough.We believe the de-rating of the sector,due to acombination of cyclical and structural factors,has largely played out.But,the expected step-up in capital expenditure is likely to have implications onP/E multiple expansion,when consumer spending improves.,RELATED RESEARCHMyer Holdings-Investor day Solid execution but macroand structural headwinds(published 24 May 2012)David Jones-Strategic update suggests minimal earningsgrowth in FY13&FY14(published 22 March 2012)Coverage view:Cautious,Phillip Kimber+61(3)9679-1128 Goldman Sachs Australia Pty LtdGabriel Wilson-Otto+61(3)9679-1069 gabriel.wilson-Goldman Sachs Australia Pty LtdThe Goldman Sachs Group,Inc.,Goldman Sachs does and seeks to do business withcompanies covered in its research reports.As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in makingtheir investment decision.For Reg AC certification and otherimportant disclosures,see the Disclosure Appendix,or go Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.Global Investment Research,2,November 15,2012,Australia:Retail:Department Stores,Executive SummaryIts been well documented that Australian department stores have been relatively slow tomigrate to online offerings,with online sales currently accounting for c.1%of total sales.This compares to US or UK department stores,which generate c.10%of their total salesfrom their online operations.On a recent trip to the US,we attended the Goldman Sachs Global retail conference whichincluded presentations from over 50 companies and independently met with a wide rangeof US retailers,including a number of department stores.A consistent theme during thetrip was a strong focus by companies on reinvesting back into their businesses,inparticular with regard to technology and online capability(including the supply chain).We believe a key contributor to the slow migration of Australian department storestowards the online channel(and most listed Australian retailers for that matter)is theamount of investment made into technology and online capability.We think one keyreason for the more limited investment from the Australian department stores has been thefocus on maintaining strong dividend payouts ratios given the large weighting towardsindividual retail shareholders and the advantages to Australian taxpayers from fullyfranked dividends.As an aside,we believe the Australian department stores are not alone.Many matureAustralian companies in the consumer sector(and most likely other sectors)are likely tohave prioritized higher dividend payments over additional reinvestment into theirbusinesses and are now finding growth even more challenging in a post-GFC world.Lower growth in their own markets and the stronger A$combined with Australia having aglobally high GST free threshold on offshore products has seen international departmentstores target Australian consumers over the past few years via their online offerings.WithUS and UK department stores now as competitors,we believe the Australiandepartment stores will need to increase their investment in the online space.As a result,we have revised our forecasts for DJS and MYR to incorporate a higher level ofcapital expenditure going forward.This is funded by lowering our forecast dividendpayout ratios.In addition,forecast EBIT margins have been impacted as largely IT-relatedadditional capital expenditure has a shorter amoritisation period.Given MYRssignificantly higher level of investment over the last 5 years(e.g.,supply chain,POSsystem)we have assumed DJS requires a larger step-up in capital expenditure.Theoverall impact on our FY13E/FY14E/FY15E EPS forecasts are:DJS-3%/-7%/-10%andMYR-1%/-1%/-3%.Furthermore,our DCF valuations for DJS and MYR have fallen12%and 7%,respectively.Our 12-month share price targets remain P/E-based,whichwe lower by 3%for DJS to A$1.88 and cut by 1%for MYR to A$2.07.We retain our cautious view on domestic discretionary retailers.Consumer spendingappears to be stabilizing with some segments better but generally still remains tough.Webelieve the de-rating of the sector due to a combination of cyclical and structural factorshas largely played out.However,the expected step-up in capital expenditure is likely tohave implications on P/E multiple expansion,when consumer spending improves.On the positive side,we note the speed at which two of the UK department stores(Debenhams and Marks and Spencer)have grown their online businesses.Over the past 5years,both companies grew their online sales from c.1%to levels more inline with their USpeers now.This provides an example of how quickly department stores can ramp up theironline channel once they commit to building the capability required.Goldman Sachs Global Investment Research,3,November 15,2012,Australia:Retail:Department Stores,Comparison of deployment of available cashOver the past 7 years,there has been a strong focus by offshore department stores oninvesting back into their business,in particular in their online capability(both technologyand supply chain).Over the same period,the listed Australian department stores havebeen more focused on returning capital to shareholders,largely via dividends.Note wecompare the period commencing FY05(or IPO if later)to FY12.The exhibits below show the deployment of available cash over the time period for thelisted Australian department stores,the listed US department stores and the listed UKdepartment stores.Given there are scale benefits in relation to capital expenditure wehave chosen to compare the deployment of available cash,rather than capital expenditure,expressed as a%of sales.In any event,both MYR and DJS capital expenditure as a%ofsales over the period shown(3%to 4%)has been toward the bottom end of the average forthe US and UK department stores(3%to 7%).,Exhibit 1:Cash allocation-US Department storesFY05 to FY12USDepartmentStoresCapitalExpenditureDividends&BuyBacksDebtRepaymentAcquisitionsOtherSource:Company data,Goldman Sachs Research estimatesNote:Simple average of Macys,Nordstrom,JC Penny,Saks,Target,KohlsExhibit 3:Cash allocation David JonesFY05 to FY12DavidJonesCapitalExpenditureDividends&BuyBacksDebtRepaymentAcquisitionsOtherSource:Company data.,Exhibit 2:Cash allocation-UK Department storesM Debenhams FY07 to FY12UKDepartmentStoresCapitalExpenditureDividends&BuyBacksDebtRepaymentAcquisitionsOtherSource:Company data,Goldman Sachs Research estimates.Note:Simple average of Marks and Spencer,Debenhams,John LewisExhibit 4:Cash allocation-MyerFY11 to FY12(FY10 includes IPO cash flows)Myer(Sincelisting)CapitalExpenditureDividends&BuyBacksDebtRepaymentAcquisitionsOtherSource:Company data.,From FY05 to FY12,listed department stores within the US and the UK have allocated alarger portion of available cash towards capital expenditure(c.50%)than Australiandepartment stores(c.35%).In turn,Australian department stores have made a relativelyGoldman Sachs Global Investment Research,4,November 15,2012,Australia:Retail:Department Stores,larger allocation of available cash towards dividend payments and buy backs(c.50%)thantheir offshore peers(c.30%).In our view,one key reason for the more limited investment from the Australiandepartment stores has been the focus on maintaining strong dividend payouts ratiosgiven the large weighting towards individual retail shareholders and the advantagesto Australian taxpayers from fully franked dividends.Moreover,the tax treatment ofcapital gains in the US encourages reinvestment into the business to drive future earningsand increase the company value.The uncertain/unproven returns from online initiatives,combined with historical unsuccessful initiatives in the online channel(e.g.,DJS in theearly 2000s)have been another key reason why Australian department stores have showna reluctance to allocate capital towards building their online capability.In the exhibits above we show MYRs capital expenditure since listing in November 2009.Prior to listing,MYR had corporate owners from June 2006.They were much less focusedon dividends and buy backs,and the allocation towards capital expenditure was moreinline with the offshore listed department store peers.During this period,MYR spentconsiderable capital expenditure on their supply chain including a new merchandisesystem,distribution centers and began to implement a new point of sale system.We notefrom offshore peers that the supply chain is a crucial component in building an onlinecapability.In the Exhibits above,available cash is defined as:Net operating cash flow+plus net debt drawn+equity raised+divestmentsNote that net debt drawn was selected as opposed to gross debt to remove the impact ofdebt refinancing.Strong growth in online sales for offshore department store peersAs highlighted in Exhibit 5,online retail sales have grown rapidly for offshore departmentstores and sits between 6%and 20%of total sales.Furthermore online sales have driven amuch higher%of total sales growth at between c.20%to c.60%over the periods shown.While this reflects some cannibalization of physical store sales,it also includes significantincremental sales,including sales from offshore customers.In our view,the limited investment into technology and online capability by theAustralian department stores has been a key contributor to the slow migration ofAustralian department stores towards the online channel(c.1%of total sales for bothMYR and DJS).However,we note that earlier this year both MYR and DJS providedinvestors with presentations regarding developing their omni-channel offering.Both havebegun to build out their capabilities,including the recent launch of DJS new webstore andincreased functionality on MYRs website.It is interesting to note the speed at which two of the UK department stores grew theironline businesses(Debenhams and Marks and Spencer).Over the past 5 years,bothcompanies grew their online sales from levels similar to the Australian department storesto levels more inline with their US peers now.This provides an example of how quicklydepartment stores can ramp up their online channel,once committing to this channel andbuilding out the capability required.Goldman Sachs Global Investment Research,1,5,November 15,2012,Australia:Retail:Department Stores,Exhibit 5:Online as a%of Total Sales For Offshore Department Stores%of$sales,2007,2008,2009,2010,2011,2012,growth,US Retailers,NordstromMacysJC Penny,5.2%2.8%7.6%,6.1%3.8%8.1%,6.8%4.8%8.5%,7.6%5.8%8.4%,8.7%7.8%8.7%,n.a.n.a.n.a.,20%n.m.n.m.,UK Retailers,DebenhamsMarks&SpencerJohn Lewis,1.1%1.9%7.0%,1.8%2.4%9.5%,2.4%3.6%11.8%,4.0%4.3%13.6%,6.8%5.6%16.7%,9.3%5.6%20.5%,56%21%65%,Source:Company data1.%of$incremental sales growth over the period shown.n.m.if no incremental sales growth over the period shown.Current online initiatives of offshore peersThe offshore department store peers are in various stages of migration towards moreonline retailing(i.e.,online sales range between 6%to 20%of total sales).As a result,there is a wide range of online initiatives being undertaken by them,but generally allcontinue to invest heavily in online capability from an infrastructure perspective(ITsystems and architecture and distribution centres).For example,Nordstrom spent US$100mn on ecommerce in 2011 and expects to spendUS$140mn on ecommerce in 2012.Saks has announced project evolution where it expectsto spend US$85mn to US$95mn on its migration to an omni-channel business over thenext 4-5 years.In its FY11 annual report Marks&Spencer advised it planed to spend150mn on its multi-channel strategy over the next 3 years.All the offshore department store peers are moving to a multi/omni channel platform andsome of the capital expenditure initiatives are directed towards integrating online and storeselling channels.Omni channel initiatives include mobile POS devices(i.e.,Nordstrom isrolling out 6,000 units across its stores),updating POS systems and incorporating itemlevel RFID tags to provide inventory visibility across the whole business,building out storebased fulfillment systems(including dedicated in-store pick up areas),equipping sellingstaff with iPads to showcase th