Myer’s (ASX.MYR) first-half fiscal 2026 sales were up 2%, after adjusting for the acquisition of five apparel brands from Premier Investments. Despite the slight sales uplift, underlying net profit after tax fell by 17%, driven by lower gross margins and greater development costs.

Why it matters: Earnings are weaker than we expected, mainly driven by development costs, including its new marketplace, and discounting to clear inventory of discontinued brands. We trim our sales growth and lower our EBIT margins forecast by one percentage point to 3.8% for fiscal 2026.

  • We also cut our long-term EBIT margin forecast by 130 basis points to 4.3%. We believe operating expenses to develop the business will remain high; we now assign a 0% probability to the realization of approximately $30 million in merger and integration benefits.
  • Nevertheless, we see margins improving and expect discounting to normalize, lifting gross profit margins by 50 basis points, with 75% of discontinued lines now cleared.

The bottom line: We lower our fair value estimate for no-moat Myer by 28% to $0.60 per share. Shares are materially undervalued. While department stores are facing structural headwinds and more online competition, we forecast sales growing by 1% per year and hold margins steady from fiscal 2027.

  • The share price implies that underlying EBIT margins deteriorate significantly and level out at around 2%. We see this as overly pessimistic and anticipate the gradual decline of in-store sales to be countered by shifting sales online and shrinking floorspace.
  • There is upside to our fair value estimate if management can trim elevated development costs and capture targeted benefits from its national distribution center as well as outstanding integration benefits. This could add about AUD 0.20 per share to our valuation.

Myer’s Material Margin Crunch Unlikely to Repeat in Fiscal 2026

Myer targets the middle market, selling mostly apparel items in competition with department store David Jones and other fashion retailers.

Myer materially expanded its business portfolio in 2025, merging with five apparel chains previously owned by Premier Investments. These brands mostly sell private-label products, which Myer designs and sources. We anticipate significant earnings benefits from the expansion, with cost efficiencies from shared logistics, greater scale fractionalizing overhead costs, and leveraging off the exclusive label expertise in the acquired apparel brands.

Exclusive brands have much higher gross margin, and substituting exclusive brands for national brands and concession sales offers significant margin upside.

With entry into the Australian market of brands like Zara and H&M, and online competition from players such as Amazon, we expect domestic department stores and domestic fashion retailers will increasingly find it difficult to compete with the international disrupters because of limited comparable sales volume growth.

We expect online sales to become an even more meaningful percentage of sales during the next decade as consumers increasingly perceive online retailers as offering value and convenience. Myer’s strategy is to strengthen its online presence and is rapidly growing its e-commerce business, while rationalizing its physical footprint to maintain productivity levels, owing to relatively weak sales growth in the brick-and-mortar channel. But we forecast competition from e-commerce to intensify.

While we expect the online channel to grow faster than the brick-and-mortar channel to fiscal 2030, and Myer to partially capture its share of this e-commerce growth, Amazon Australia will pursue its piece of the pie, leading to a decline in the size of the sector’s addressable market.

Bulls Say

  • Myer is an iconic Australian department store brand that resonates with Australians. It is hanging onto this perception by improving its stores and online offerings to meet customer demand.
  • Myer is well placed to rebound strongly if it can successfully navigate the current economic slowdown.
  • Strategic initiatives—aimed at vertically integrating retail from design, manufacture, and sales—ensure that Myer is capturing a higher share of gross margin and control of its exclusive bands.

Bears Say

  • Myer, with the associated cost of its store network and distribution assets, operates at a disadvantage to online competitors.
  • Myer’s metropolitan flagship stores enable brands to present products and build awareness while driving foot traffic, but nonexclusive brands are also available elsewhere.
  • Omnichannel apparel retailers, including Myer, must gradually reduce floor space as footfall declines because Australian consumers increasingly shop online. Myer is likely to spend significant capital to build its online platform and offset lower sales from its store network.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.