By Chris Shaw

On face value the June quarter sales result of a decline of 1.4% overall and a decline of 0.9% for like-for-like sales reported by Myer ((MYR)) is a soft result, but the true measure of the result is how it compares to the sales results of other large retailers.

On this basis, Citi suggests the result was actually quite a solid one, especially when the current challenge of cycling previous stimulus measures is considered. The sales result was accompanied by an increase in earnings guidance, earnings before interest and tax (EBIT) now expected to be in a range of $265-$272 million, up from $261 million previously.

According to Goldman Sachs, the increase in guidance reflects lower shrink rates, meaning less items are being stolen, improved sourcing costs and some product mix benefits from growth in Myer Exclusive Brands.

The improvement in the latter is a positive for group margins, a trend Credit Suisse sees as sustainable given the data show customers are accepting the move to grow the Myer Exclusive Brands product offering.

Citi also suggests Myer benefited from improving operating leverage on the back of improving sales month-on-month through the quarter. On the broker's estimates, a 1% improvement in sales relative to expectations translates to a 3.2% improvement in EBIT.

What should also help sales in coming months is Myer is expected to have a new point of sales system in place by Christmas, something RBS Australia sees as a positive for sales growth as transaction time should come down by as much as 80%.

As well, Citi expects sales will improve in coming periods given new store openings and the soon to be completed refurbishing of the Bourke Street store in Melbourne. While 1Q11 sales may remain soft, Citi is forecasting 8% sales growth for Myer in the second half of 2011.

To reflect this, Citi has lifted its earnings estimates, increasing its FY10 earnings per share (EPS) forecast by 3.1% to 28.3c and in FY12 by 1.9% to 32.8c. FY11 EPS is unchanged at 30.8c. RBS Australia similarly lifted estimates by 4.6% in FY11 and by 4.1% in FY12 and its EPS estimates now stand at 28.6c this year, 33.6c in FY11 and 36.9c in FY12.

JP Morgan also lifted forecasts by 2.0-3.5% post the sales result and now expects EPS of 27.7c this year, 31.3c next year and 35.6c in FY12, while consensus forecasts for Myer according to the FNArena database stand at 26.7c this year and 31c in FY11.

Looking forward, RBS Australia sees Myer as well placed to benefit from a cyclical upswing in retail sales, especially as the group has a relatively high fixed cost base. As this upswing takes hold, the broker sees a re-rating for the stock as likely and to reflect this its target price has risen to $4.36 from $4.06.

Citi also lifted its target by 15c to $4.15 but Credit Suisse went the other way, dropping its target to $4.80 from $5.10. This reflects the fact the broker has now accepted its previous earnings forecasts for Myer were overly optimistic. The average price target for Myer now stands at $4.38, up from $4.35.

Despite the cut in its target, Credit Suisse continues to see value in Myer at current levels, meaning no change to its Overweight rating for the stock. Most in the market agree as the FNArena database shows Myer is rated as Buy eight times, Accumulate once and Underperform just once.

This negative view comes courtesy of MA Merrill Lynch, who downgraded from a Neutral rating post the sales result.

Value is the issue for BA-ML but in an opposite sense compared to the rest of the market as the broker's model generates a price target for the company of $3.15 per share. Given the stock has gained more than 20% since the end of May, including a 5% gain yesterday post the sales result, the broker simply doesn't see the stock as good buying at current levels.

This also reflects concerns over the sustainability of Myer's business model, as BA-ML suggests there is a real risk management has cut costs too aggressively to meet earnings targets and will need to lift reinvestment at some point in the future.

To account for this, BA-ML has Myer third in its discretionary retail pecking order behind JB Hi-Fi ((JBH)) and David Jones ((DJS)), though it puts the company ahead of Billabong ((BBG)). This compares to the order of preference of Goldman Sachs of Myer, then David Jones then JB Hi-Fi.

Shares in Myer today are higher and as at 12.25am the stock was up 7c at $3.71. This compares to a range over the past year of $2.86 to $3.98 and implies upside of around 15% to the consensus price target in the FNArena database.

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