A n n u a l R e p o r t 2 0 1 1 M y e r Annual Report 2011 Strong Foundations Annual Report 2011 i l H o d n g s L m i t e d i A B N 1 4 1 1 9 0 8 5 6 0 2 105090 Cover CS5 R1.indd 1-3 13/10/11 2:40 PM M Y E R H O L D I N G S L I M I T E D Annual Report 2011 Contents About Myer Highlights From the Chairman From the CEO Review of Operations Sustainability Board of Directors Management Team Corporate Governance Statement Directors’ Report Remuneration Report Financial Report Auditor’s Report Shareholder Information Corporate Directory Myer Holdings Limited ABN 14 119 085 602 105090 Cover CS5 R1.indd 4,6 Annual General Meeting The 2011 Annual General Meeting of Myer Holdings Limited will be held at Mural Hall, Level 6, Myer Melbourne, Bourke Street Mall, Melbourne, Victoria on Friday, 25 November 2011 at 11am. 02 04 06 08 10 20 24 26 28 35 40 54 111 114 Inside Back Cover Corporate Directory Myer Customer Service Centre PO Box 869J Melbourne VIC 3001 Phone: 1800 811 611 (within Australia) or +61 3 8667 6000 (outside Australia) Fax: +61 (0) 3 8667 6091 Auditor PricewaterhouseCoopers Level 19, Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 Securities Exchange Listing Myer Holdings Limited (MYR) shares are listed on the Australian Securities Exchange (ASX). Website www.myer.com.au About this Annual Report The Myer Holdings Limited Annual Report is available online at www.myer.com.au/investor. Hard copies can be obtained by contacting our share registry. Annual General Meeting The 2011 Annual General Meeting of Myer Holdings Limited will be held at Mural Hall, Level 6, Myer Melbourne, Bourke St Mall, Melbourne, Victoria on Friday, 25 November 2011 at 11am. Registered Office details Myer Holdings Limited Level 7 800 Collins Street Docklands VIC 3008 Phone: +61 (0) 3 8667 6000 Myer Support Office 800 Collins Street Docklands VIC 3008 Phone: +61 (0) 3 8667 6800 Myer Postal Address Myer Holdings Limited PO Box 869J Melbourne VIC 3001 Company Secretary Marion Rodwell General Counsel and Company Secretary Shareholder Enquiries: Share Registry Computershare Investor Services Pty Ltd Postal address GPO Box 2975EE Melbourne VIC 3000 Myer Shareholder Information Line 1300 820 260 (within Australia) +61 3 9415 4332 (outside Australia) www.investorcentre.com Investor Relations Davina Gunn Investor Relations Manager Phone: +61 (0) 3 8667 7879 Mobile: +61 (0) 400 896 809 Email: myer.investor.relations@myer.com.au Media Relations Jo Lynch General Manager Corporate Affairs Phone: +61 (0) 3 8667 7571 Mobile: +61 (0) 438 101 793 Email: myer.corporate.affairs@myer.com.au C R E A T E D B Y D E S I G N A T E 13/10/11 2:40 PM 01 Myer Holdings Limited A focused retail business with strong management Our significant investment since 2006 has set strong foundations for a sustainable business, demonstrated in the current challenging environment. We are committed to optimising our store network, improving customer service and delivering a leading omni-channel offer. 11141_MYER_AR11_Editorial_PPv1.indd 1 10/10/11 11:58 AM 02 M y e r H o l d i n g s liMi t e d Annual Report 2011 About Myer Myer is Australia’s largest department store group, synonymous with style and fashion for over 100 years. New stores and refurbishments The Myer store network includes a footprint of 67 stores in prime retail locations across Australia. We have stores in 28 of the top 30 shopping centres across Australia. We have a strategy to expand the store network through new stores, replacement stores and refurbishments, and to continue to build on the momentum of our world-class, international award winning flagship Melbourne store. Myer Exclusive Brands Our merchandise offer includes over 50 brands that are owned by Myer. The Exclusive Brands offering is across many price points and ranges from entry-point basics to designer fashion. We have established Global Sourcing Offices in Hong Kong and Shanghai to drive further growth of our Myer Exclusive Brands (MEBs), source product more efficiently and improve profitability. MYER one loyalty program The MYER one loyalty program is a key competitive advantage for the business. This loyalty program provides unique insights into customer shopping preferences and is an effective way of communicating with our customers ensuring they receive relevant and targeted offers. Loyal MYER one members earn shopping credits for shopping at Myer as well as a range of affiliate businesses that have partnered with the program. Rewards are distributed in the form of MYER one reward gift cards and when redeemed in Myer stores members spend on average 3.6 times the value of the reward card. Selling space optimisation Across our store network, we continually review the way our stores are presented through product mix and brand placements. This is to ensure we are delivering the best possible merchandise offer, improving the customer shopping experience and ultimately achieving maximum return per square metre of selling space for our shareholders. Known for a welcoming, familiar, trusted and stylish shopping environment, Myer has a strong connection with its customers, with one of the most reputable retail brands in Australia. Vision: “To be an international-class retailer providing inspiration to everyone” Our focus on providing inspiration to everyone includes our customers, our 13,000 team members, our 56,000 shareholders, our 800 suppliers globally and the many communities that we engage through our strong brand. In financial year 2011, total sales were $3.159 billion. Myer is a significant employer and has a long history of philanthropy and local community engagement. Inspiring and delighting our customers through newness, innovation and inspiration Myer offers eleven core product categories including: Womenswear; Menswear; Youth fashion; Childrenswear; Intimate apparel; Beauty, fragrance and cosmetics; Homewares; Electrical goods; Toys; Fashion accessories; and General merchandise. A true department store, Myer offers a comprehensive and fashion focused ‘whole of home’ solution, stocking over 600,000 product lines, comprising 2,400 brands sourced from over 800 suppliers globally. The brand offering includes well-known national brands, Australian and International designers, as well as over 50 brands owned and distributed exclusively by Myer, including Vue, Basque and Blaq. Myer’s strategic plan The business model we have had in place since 2006 is flexible and sustainable which has helped us to manage recent volatile retail trading conditions. We continue to implement this strategy focusing on the key elements: › New stores growth and refurbishments › Grow our Myer Exclusive Brands › › Build and strengthen MYER one loyalty program Ensure product mix and floor selling space delivers optimal financial returns › Improve customer service › Deliver a flexible omni-channel offer › Continue to reduce shrinkage 01 01 Our team members are key to the success of Myer 02 New stores and refurbishments continue to inspire and delight our customers 03 Brand awareness is enhanced through in-store theatre and events as well as seasonal fashion launches 04 Exciting new brands have further strengthened our fashion credentials 05 We are building a customer service and performance-based culture across the business 06 Our MYER one loyalty program delivers a key competitive advantage 11141_MYER_AR11_Editorial_PPv1.indd 2 10/10/11 11:58 AM 03 02 03 Improving customer service Reducing shrinkage Our people are critical to achieving our vision and delivering our strategic plan. We are continuing to build a customer service and performance-based culture across the business. This includes fostering the development of all of our team members from our graduates, to high performing store managers to our buyers and support office teams. The support of our committed and experienced senior management team helps to build this culture focused on achieving results. In response to customer feedback, we have a renewed focus on improving customer service through the investment in additional selling hours in high service categories and a comprehensive program including training, product knowledge and other initiatives. Omni-channel retailer In a rapidly changing technology environment Myer continues to develop and implement a flexible omni-channel offer for our customers. The channels include our significant store network complemented by enhanced online, digital and mobile platforms. Reducing the level of theft and fraud in our stores contributes to improving our profitability. We have made excellent progress in initiatives to reduce shrinkage. Strong foundations We have made significant progress on our strategic plan. We have invested over $600m in capital since 2006 to build a sustainable retail business platform and these strong foundations have been proven during the recent economic downturn. Our vision is to be an international-class retailer providing inspiration to everyone – our customers, team members, shareholders and suppliers. 04 05 06 11141_MYER_AR11_Editorial_PPv1.indd 3 10/10/11 11:58 AM 04 My er Holdings Annual Report 2011 l i M i ted Highlights Myer delivered a solid result this year in the context of a very tough retail environment. Consumers continue to be reluctant to spend in the face of a number of increased cost of living pressures, the imminent imposition of new taxes, uncertainty surrounding interest rates and an increased propensity to save. The challenging economic conditions experienced in the first half were exacerbated by the floods in Queensland and Victoria. During the second half of the year domestic and global political and economic uncertainties, as well as rising unemployment, further impacted consumer confidence. Financial highlights1 › › › Sales down 3.8 percent to $3,158.8 million, down 5.5 percent on a like-for-like basis Excluding Electrical, total sales were down 1.2 percent Electrical restructure represented a $32.4 million reduction in total sales with exit of non-performing categories and replacement with more profitable categories › Operating gross profit margin up 63 basis points to 40.26 percent › Continued focus on costs, overall cash costs declined 3.4 percent to $933.7 million › › Earnings before Interest, Tax, Depreciation and Amortis- ation (EBITDA) margin increased by 50 bps to 10.7 percent Earnings before interest and tax (EBIT) of $258.9 million (FY2010: $270.9 million) › EBIT margin of 8.20 percent (FY2010: 8.25 percent) › Net profit after tax (NPAT) of $162.7 million (FY2010: $168.7 million) › Basic earnings per share of 27.9 cents (FY2010: 29 cents) 3500 3000 2500 2000 1500 1000 500 0 ” Strong foundations deliver solid result in challenging environment. ” Net profit after tax ($m) 73.2 95.8 108.7 168.7 162.7 07 08 09 10 11 Earnings before interest and tax (EBIT) ($m) EBIT margin (%) 8.3 8.2 7.2 6.4 › Disciplined inventory management, like-for-like inventory increased by $7 million (up 2.0 percent) Return on funds employed (ROFE) of 21.4 percent on a rolling 12 months basis (FY2010: 24.1 percent) Refinance of debt facilities with margins and strong support from lenders improved interest 5.0 Interim dividend of 11.0 cents per share and final dividend of 11.5 cents per share, taking the full year dividend to 22.5 cents per share. 300 › 275 › 250 › 225 200 175 150 1 FY11 financial metrics shown on pages 4 to 9 represent the statutory 52 week financial results as reported in the Financial Report, adjusted to remove certain one-off charges where relevant. Prior period comparatives, and variances to prior period, where shown, are calculated with reference to 52 week pro forma values for FY2010 to ensure comparability. Refer Financial Performance section of Review of Operations on page 11 for detailed discussion of financial performance, including commentary on the composition of the numbers referenced above. 165 213 236 271 259 07 08 09 10 11 200 150 100 50 0 10 8 6 4 2 0 11141_MYER_AR11_Editorial_PPv1.indd 4 10/10/11 11:58 AM Strong foundations deliver solid result in challenging environment. 100 80 60 40 20 0 100 80 60 40 20 0 22.5 22.0 21.5 21.0 20.5 20.0 29.25 27.65 26.05 24.45 22.85 21.25 Full year dividends (cents) Earnings per share (cents) 22.0 22.5 29.0 27.9 10 11 10 11 05 Operational highlights The $600 million capital investment made since 2006 has established strong foundations for the business that helped us to manage through challenging conditions over the past 12 months: › Flagship Myer Melbourne reopened, as well as new stores at Top Ryde (New South Wales) and Robina (Queensland). A new store at Mackay (Queensland) is expected to open on time in October 2011 › Refurbished stores at Charlestown (New South Wales), Canberra (ACT) and Garden City (Western Australia) › Further growth in Myer Exclusive Brands mix, now represent 17.7 percent of department store sales › Continued investment in capex of $113 million (including Myer Melbourne and point-of-sale (POS) system) › Global Sourcing Offices established in Hong Kong and Shanghai › › Improved merchandise offer with new brands extending the breadth and depth of range sass & bide strategic alliance established with purchase of 65 percent stake 30 › Progressed customer service strategy supported by renewed focus on optimising promotions 25 20 30 25 20 15 10 5 0 100 80 60 40 20 0 50 40 30 20 10 0 Myer department store network (number) Operating gross profit margin (%) › Further developed e-commerce, digital marketing and social media strategy. 15 70 10 5 0 61 65 65 65 67 39.6 40.3 07 08 09 10 11 10 50 11 11141_MYER_AR11_Editorial_PPv1.indd 5 10/10/11 11:59 AM 06 M y e r H o l d i n g s liMi t e d Annual Report 2011 From the Chairman I am pleased to present the 2011 Myer Holdings Limited Annual Report to shareholders. Business performance Total sales for the full year ended 30 July 2011, were $3.158 billion, down 3.8 percent on last year, reflecting an unprecedented trading environment and weak consumer sentiment. We reported a net profit after tax of $162.7 million, down 3.6 percent on last year and in line with the guidance provided to the market earlier in the year. This is a solid result given the challenges we faced. We maintained a strong focus on reducing costs, managing our promotional program and achieved an improved operating gross profit margin as well as a clean inventory position at year-end – an excellent result. These achievements, together with our strong balance sheet, represent highlights in a challenging year. The Board was pleased to deliver an increased full year dividend to shareholders. A strong balance sheet, strong cash generation and a robust profit performance, has led Directors to announce a fully franked final dividend of 11.5 cents per share, taking the total dividend for the year to 22.5 cents per share. The dividend will be paid on 16 November to all shareholders registered on 30 September 2011. Operational highlights While we understand the significant macro-economic factors that are impacting many discretionary retailers, we have remained focused on delivering our strategy. Our new flagship Melbourne store has been well received with sales gaining momentum since reopening in March. In addition we opened two new stores. In February, we purchased a 65 percent stake in sass & bide, a very successful Australian women’s fashion brand. This business, which has significant growth potential, is an excellent addition to our existing brand portfolio. In July, we realised an $8.2 million profit after tax when we sold our 26 percent stake in Harris Scarfe as we believe our capital can be better directed within our own business. Our people and the communities in which we operate are key to the Myer business. Following the floods in Queensland and Victoria, we supported a range of fundraising and relief efforts. Myer team members, our suppliers and customers generously responded to these events. We remain committed to our valuable relationships with charities including the Olivia Newton-John Cancer and Wellness Centre Appeal, the Salvation Army and Vision Australia. Australian retail environment The 2011 financial year presented an extremely challenging environment for the discretionary retail sector. Consumer confidence was impacted by increasing cost of living pressures including costs of education and health care, new taxes in the flood levy and proposed carbon tax and interest rate uncertainty. In the first half, natural disasters including the devastating floods in Queensland and Victoria impacted many communities and our business in those areas. The second half was characterised by domestic and global economic and political uncertainty as well as rising unemployment. This backdrop presented the most difficult trading conditions I have seen in my retail career. I am pleased that Bernie and his management team have performed well in dealing with the issues presented to them and continue to be firmly focused on implementing our strategic plan. I strongly believe the key is maintaining an adaptable and flexible approach and being able to fine-tune all elements of our business. Strong foundations We have invested over $600 million in capital in the business since 2006, significantly improving our supply chain, point-of-sale and merchandise systems. This has delivered a highly efficient and flexible retail platform, enabling management to better control inventory and adapt to the volatile trading conditions. Our strategy continues as planned in the face of external challenges. We are delivering new stores, store refurbishments, an improved merchandise offer, an omni-channel offer and have a focus on improving customer service. The Board is very supportive of management plans to invest significantly in improving customer service. As with any investment, return on investment hurdles must be achieved and progress to date is very encouraging. 11141_MYER_AR11_Editorial_PPv1.indd 6 10/10/11 11:59 AM 07 Myer’s transformed business model delivered a SOLID FINANCIAL PERFORMANCE. Our Global Sourcing Offices in Shanghai and Hong Kong opened during the year and will enable further growth of our Myer Exclusive Brands, ensuring we deliver the right product to stores quickly and efficiently. We are committed to building a socially responsible and sustainable business. In June, the Board endorsed our Ethical Sourcing Policy. The policy confirms our commitment to the ethical manufacture and supply of merchandise for our business, and working with suppliers to improve their social and environmental practices. The Board I acknowledge the support and dedication of the Board this year and I am confident that they have the credentials and requisite diversity to serve the interests of our shareholders. To complement the existing Board, in December, we appointed Chris Froggatt as a new Director who brings over 20 years’ executive experience as a human resources specialist in leading international companies. In August the Board was pleased to reach an agreement with CEO Bernie Brookes to extend his contract until August 2014. While Bernie’s previous contract was due to expire in August 2012, the Board agreed a new contract to provide stability and continuity of management. Bernie has a strong vision for Myer and is committed to delivering our strategy. The expected continuation of economic challenges in the short-term demand the attention of a highly experienced retailer as Chief Executive, supported by a strong management team. ” I strongly believe the key is maintaining an adaptable and flexible approach. ” Outlook While there are no clear short-term indicators of when consumer confidence will return to more normal levels, the leverage potential is significant for this highly efficient business. On behalf of the Board, I take this opportunity to thank Bernie and his management team as well as all the 13,000 Myer team members who help deliver the best possible results for shareholders. As we look to the future, I would like to sincerely thank you, our shareholders and customers, for your ongoing support. Howard McDonald Chairman 105090 Editorial ColourCorrections CS5.indd 7 13/10/11 2:47 PM 08 M y e r H o l d i n g s liMi t e d Annual Report 2011 From the CEO ” A solid result in a very difficult trading environment reflecting the investment made over the past five years. ” last year’s annual report I outlined the In significant investment we had made since 2006 to turn the business around and prepare for growth. In 2011, the strong foundations established as a result of that investment have served us well and allowed us to successfully navigate the unprecedented and volatile retail trading conditions. We have delivered on many of our business objectives – rigorously managed inventory and costs, introduced new brands and improved our store presentation. Our plans have been challenged by the generally cautious consumer but we have successfully continued to progress our strategic plan. Business performance Total sales for the full year ended 30 July 2011 were $3.158 billion, down 3.8 percent on last year, and like-for-like basis. Sales down 5.5 percent on a were disappointing, however, in the context of the challenging retail environment, I am pleased with the resilience of Myer’s performance on a number of levels. The decision to exit whitegoods and significantly reduce our music and DVD offering, combined with significant price deflation across a number of electrical and entertainment product lines, impacted sales. It was pleasing to report an increased operating gross profit margin up 63 basis points to 40.26 percent. This was driven by an increase in Myer Exclusive Brands (MEBs) as a percentage of sales, a further reduction in shrinkage, changes in product mix, and improved sourcing. We have over 50 MEBs, many of which are household names and represent a multitude of price points and ranges. We maintained a disciplined focus on costs across the business and the overall cash cost base declined 3.4 percent to $933.7 million. We successfully delivered an increased EBITDA of $337.9 million, up 0.9 percent. In addition, EBITDA margin increased 50bps to 10.7 percent. EBIT was down 4.4 percent to $258.9 million. An EBIT margin of 8.2 percent represented a solid result. We reported a net profit after tax of $162.7 million, down 3.6 percent on last year. Our merchandise system, new POS system and improved supply chain ensured that we successfully managed our inventory. A key highlight for 2011 was the reopening of our flagship Myer Melbourne store in March. The store continues to gather sales momentum, with a positive uplift in sales, and importantly a very strong customer response and a significant increase in the number of customer compliments received. The store was recognised internationally, winning the Store Design of the Year award at the 2011 Oracle World Retail Awards. This is an extremely prestigious award and we are so proud of the team that delivered the Melbourne store. We opened two new stores at Top Ryde (New South Wales) and Robina (Queensland). In Queensland, we will shortly open our new store at Mackay and our new store at Townsville is on track to open in May 2012. In March, we purchased 65 percent of sass & bide, a highly successful Australian designer brand that complements our womenswear offer. The rollout of sass & bide to 30 stores is progressing well and our customers have responded positively. We were delighted to strengthen our merchandise offer with new brands including Arthur Galan AG, Simona and Fleur Wood joining our brand portfolio during the year. 11141_MYER_AR11_Editorial_PPv1.indd 8 10/10/11 11:59 AM 09 Capital investment since 2006 of $600m ENSuRES MYER IS wELL LEvERAgED FOR gROwTH. The opening of our Global Sourcing Offices in Shanghai and Hong Kong will enable us to further develop our direct sourcing capabilities, underpinning the growth in our Myer Exclusive Brands as well as enhancing gross margin. During 2011, we invested in developing a fully integrated digital and online offer for consumers. We are committed to further developing our omni-channel offer with a new web platform to be launched later this year, featuring improved product research capabilities, product availability and e-commerce functionality. Despite the challenging environment I am pleased that we progressed our strategies to reduce overall markdowns and invest in customer service. I am excited by the early progress. The significant and much needed investment in more selling hours, increased training, improved rostering and incentives is building momentum. for service excellence Stores are receiving positive feedback from team members and customers – with increasing numbers of compliments demonstrating that we are achieving real traction. Our investment in customer service is targeted and measured and will continue to be rolled out during 2012. Our people We were pleased to reach agreement on the Myer Stores Agreement 2010. The increases in wage and other benefits for store team members under the agreement are recognition of the contribution and commitment Myer team members make to the Company. last year. Lost time injury frequency rate was reduced, representing a 20 percent improvement on 2010. I would like to thank all our team members, including the management team, for their commitment and support. Australian retail sector January, In the Commonwealth Government announced a Productivity Commission Inquiry into the Australian retail sector. This was an important opportunity for Myer to contribute to a public discussion about the retail sector and its future prospects. Myer seeks a reassessment of the low importation threshold and a clear understanding of the implications of increasing labour costs through penalties and casual loadings on trading hours, trading days and workforce composition. We continue to monitor the Inquiry and hope the outcomes deliver reform to ensure the retail industry can continue delivering economic benefits to all Australians. Outlook Although the retail environment remains extremely challenging, our strong, experienced and committed team will continue to manage the business appropriately. The business model we have developed since 2006 is flexible and sustainable, the foundations of which will continue to help us to meet future challenges. During the year, we continued to see ongoing improvements in our safety performance across the business with all of our safety measures improving on Bernie Brookes Chief Executive Officer and Managing Director 11141_MYER_AR11_Editorial_PPv1.indd 9 10/10/11 11:59 AM 10 My er Holdings Annual Report 2011 l i M i ted Review of Operations Our world-class supply chain, leading merchandise offer, store network and strong brand provide huge potential to deliver a leading omni-channel offer. 04 05 The highlights of 2011 included the reopening of our world-class flagship store at Myer Melbourne and two new stores at Top Ryde in New South Wales and Robina in Queensland. We focused on improving customer service with a targeted and measured investment funded by optimising our promotions. Our merchandise offer was significantly enhanced with the addition of new brands to inspire and delight our customers. We acquired 65 percent of the leading Australian designer brand sass & bide to complement our womenswear offer. Our focus on digital marketing and social media continued throughout the year as we further developed our omni-channel offer. Global Sourcing Offices were established in Shanghai and Hong Kong to support the growth of our Myer Exclusive Brands strategy. 02 06 03 07 01 11141_MYER_AR11_Editorial_PPv1.indd 10 10/10/11 11:59 AM 11 Financial performance1 The Group delivered a solid result for the financial year, in the context of a challenging retail trading environment. Total sales for the 52 weeks to 30 July 2011 were $3,158.8 million, down 3.8 percent compared to last year (52 weeks). On a like-for-like basis sales were down 5.5 percent. Included in this result is $14.1 million in sales from sass & bide (since the acquisition of the 65% shareholding on 2 March 2011). Operating gross profit margin increased by 63 basis points to 40.26 percent compared to last year. Drivers of this result were increased profitability from Myer Exclusive Brands, reduction in shrinkage, improved sourcing, optimised promotional strategy and improved product mix. The strong Australian dollar also assisted margins and helped mitigate some higher input costs for product sourced from Asia. Costs continued to be tightly managed during the year and the overall cash cost of doing business declined by 3.4 percent to $933.7 million. Depreciation increased from $64 million last year to $79 million as a result of the completion of capital projects (including new POS system, Myer Melbourne rebuild and new support office). EBITDA margin increased by 50 bps to 10.7 percent and EBITDA was up 0.9 percent to $337.9 million. EBIT was $258.9 million, down 4.4 percent compared to last year. The impact from sass & bide in the consolidated FY2011 NPAT was negligible, as expected when we purchased the 65% shareholding. As a result of the ongoing review of our business we have provided for the costs associated with the rationalised music and DVD offer, the exit of gaming and consoles from stores, a reduction in headcount in support office and the pending closure of the Forest Hill store, resulting in a store closure and restructuring charge in the year of $10.5m ($7.6m after tax). In July 2011 we divested our shareholding in the retailer, Harris Scarfe, as we believe our capital can be better directed within our business, generating a profit on sale of $11.7m ($8.2m after tax). NPAT before one-offs in relation to the sale of our share in Harris Scarfe, the restructuring charge and IPO costs was down 3.6 percent to $162.7 million. Statutory EBIT for FY11 was $260.1m, down 3.8% on FY10. Statutory NPAT for FY11 was $159.7m after IPO costs, up 137.7% on FY10, reflecting the impact of IPO costs of $96.3m on the prior year. We maintained our focus on inventory management during the period. Taking into account stock held for our new store at Robina and the expanded Myer Melbourne, conversion of our music and DVD offering to wholesale, sass & bide and early delivery of summer FY2012 stock, inventory was up 2.0 percent ($7 million). Operating inventory at the end of the period was $381 million. Net debt increased by $68 million to $382 million, driven in part by the purchase of the 65 percent shareholding in sass & bide in March 2011 ($41.3 million), as well as continued capex investment and a full year of paying dividends. In June 2011, we successfully refinanced our banking facilities of $625 million, extending maturity dates to June 2014 ($325 million) and to June 2015 ($300 million), with lower interest margins and strong support from our lenders. There remains significant ‘headroom’ in our banking covenants. 01 The world-class Myer supply chain is supported by four distribution centres, including one at Altona, Victoria 02 Jennifer Hawkins is the face of Myer and a key Myer Ambassador 03 Events including the 2011 Spring/Summer Fashion Launch strengthen Myer brand awareness as well as profiles of our designers 05 Australian-designer womenswear brand, Fleur Wood, joined Myer in 2011 06 Design Studio fashion accessories, was an exciting new Myer Exclusive Brand this year 07 The Miss Shop (Youth) category was a standout performer in 2011 08 Bose home theatre interactive concepts have been very popular with customers 04 Newness, inspiration and fashionability are integral to our merchandise offer 09 The arrival of prestigious designer brand, Arthur Galan AG, was an excellent addition to the Myer brand portfolio 08 09 1 FY11 financial metrics noted represent the statutory 52 week financial results as reported in the Financial Report unless otherwise stated. Prior period comparatives, and variances to prior period where shown are calculated with reference to 52 week proforma values for FY10 to ensure comparability. FY11 Net profit after tax of $162.7m excludes residual IPO costs of $3.5m (after tax), store closure and restructuring costs of $7.6m (after tax), and the profit on sale of our shareholding in Harris Scarfe of $8.2m (after tax). FY10 Net profit after tax of $168.7m represents a 52 week proforma, adjusted to remove the impact of the 53rd week of trade included in the statutory 2010 Financial Report, the effect of IPO costs, and interest and tax adjusted to reflect the post IPO capital structure as if it had been in place for the entire period. Like-for-like sales excludes new stores at Top Ryde and Robina, refurbishments and the acquisition of 65% of sass & bide. 11141_MYER_AR11_Editorial_PPv1.indd 11 10/10/11 11:59 AM 12 My er Holdings Annual Report 2011 l i M i ted Review of Operations continued Omni-channel Retailer Our store network Replacement stores and refurbishments New stores Our flagship Myer Melbourne store was opened in March with very positive feedback from our customers. Sales continue to gain momentum in this world-class department store. During the year we also opened two new stores at Top Ryde (New South Wales) and Robina (Queensland). Our new store at Mackay in Queensland is expected to open on time in October 2011, and our new Townsville store in Queensland is on track to open in May 2012. Myer will be the only full-line department store in both of these regional cities and the excitement continues to build in these communities. New stores at Fountain Gate (Victoria) and Shell Harbour (New South Wales) are already under construction, and are planned to open in 2014. While we remain committed to our new store rollout strategy, we will continue to assess the financial merits of all new and existing stores in our network as we enter lease negotiations and renewals. We made the decision recently not to renew the lease of the store in Forest Hill (Victoria), which will be closed in 2012. Forest Hill is a small store with a limited range and our MYER one data indicates that many customers choose to shop at the larger stores located at nearby Chadstone, Doncaster, Eastland and Knox City. All Forest Hill team members will be redeployed to nearby Myer stores. During the year, we announced an agreement to rebuild our store in Hobart (Tasmania) following the fire that significantly damaged the store in 2007. This redevelopment will deliver a 12,450m2 replacement store, representing significantly more selling space than the original store. We have also negotiated plans to build a replacement store at Werribee (Victoria), to deliver a significantly larger store to meet the demand in this growth corridor of Melbourne. Refurbishments were completed in our stores in Canberra (Australian Capital Territory) and Garden City (Western Australia). The Sydney City store in New South Wales was reconfigured to create space for additional apparel and footwear brands. Our Eastland store in Victoria was also refurbished and relaunched in August 2011. Works at our Liverpool store in New South Wales are due for completion in December 2011, and the refurbishment of the Carindale store in Queensland commenced in September 2011. Improving customer service remains a priority Improving customer service remains a priority across the business. We have implemented a new service improvement program comprising a number of elements including additional hours in stores in high- service categories such as footwear, intimate apparel, womenswear, men’s suiting and accessories. We have 01 Team Member incentive schemes in our Electrical department help improve customer service and drive sales 02 The new POS system has increased efficiency and transaction speed and improved the customer experience 03 We are developing an omni-channel strategy as customers adapt to new technology, allowing us to communicate in new and innovative ways 04 We are investing in customer service despite the ongoing challenging retail environment 05 Our flagship Myer Melbourne store showcases innovative visual merchandise installations 01 02 11141_MYER_AR11_Editorial_PPv1.indd 12 10/10/11 11:59 AM improved commission doubled the length of the team member induction program; in electrical, furniture and cosmetics; introduced team member productivity leader boards; and continued with our service reward programs. schemes The customer service investment trial began in March in select stores and with pleasing results, we refined the formula and the rollout was extended. If results continue to meet our expectations, we will continue the targeted and measured rollout. We have also completed the rollout of new directional signage assisting the overall shopping experience for customers. Our CEO’s High Performers Club, which recognises leaders in customer service with excellent selling skills, continues to gain momentum with almost 650 team members now part of the program. We aim to have 1,000 team members inducted into the Club by the end of 2012. We continued to expand the services offered in including personal shopping, pre-season stores International and Australian designer sales, and a range of health and beauty treatments for both women and men. Improving technology in stores The rollout of new IT hardware and an updated operating platform for all stores was completed in August 2011. Including new workstations, scanners 03 and a complete refresh of all applications, this significant upgrade will increase the efficiency of executing administrative activities in stores. Following the successful rollout of new POS in all stores, completed in November 2010, we have built on our commitment to improve transaction speed and overall service. In this context, we have taken the decision to consolidate some of the POS locations into clusters within ten of our stores. This will result in larger, more visible transaction centres which will be staffed at all times during trading hours improving the customer experience. The investment in a national closed circuit TV (CCTV) network as part of a broader campaign to reduce shrinkage has continued to reduce the level of theft from stores and improve customer and team member safety. Online expansion We made some important improvements to the myer.com.au website including enhanced website merchandising, search, sort and navigation functionality as well as a wider product range. Customers have responded well to our current offer of free delivery for many online purchases and we are encouraged by the rapid growth in our online sales. We are well progressed in developing a fully integrated omni-channel offer for consumers including our stores, online and mobile. The redevelopment of our digital and online offer will include: a new e-commerce site; MYER one personalisation; click and collect in stores; a private shopping club for our top MYER one members; myfind.com super deals online; as well as other initiatives currently under development. With approximately 11 million unique visits to our website during the past 12 months, we see huge potential to provide a leading omni-channel offer leveraged off our strong brand, store network, and world-class supply chain. 13 04 05 ” We continued to evolve as an omni- channel retailer with investment in our store network, improved e-commerce offer, superior technology, all underpinned by improving our level of service to customers. ” 11141_MYER_AR11_Editorial_PPv1.indd 13 10/10/11 11:59 AM 14 My er Holdings Annual Report 2011 l i M i ted Review of Operations continued Merchandise Inspiring and delighting our customers Our focus remains on inspiring and delighting our customers across all categories with newness and fashionability. The category that was a standout performer during the year was Youth, which incorporates our highly popular Miss Shop brands. Other key categories with strong performances were Womens and Mens apparel, Home and Cosmetics. In response to changing customer demands, we decided to refine our Electrical offer to focus on product lines more synonymous with Myer. This has meant that we exited whitegoods, gaming and consoles and reduced our music, DVD and GPS offer. This restructure allows us to increase selling space allocated to our more sought-after and profitable apparel and furniture ranges. Our future electrical offering will continue to include strong performing categories such as small appliances and home theatre as well as a meaningful range of audio visual, home office and portable electronics. We were pleased with a number of strong performances in the wholesale business including Bonds, Berlei, Seafolly, Apple and the cosmetics brands MAC Cosmetics and Chanel. Our customers welcomed the launch of the popular appliance brand KitchenAid. Benefit experienced excellent growth in both product sales and services including brow waxing and lash tinting. Customers have supported our numerous Myer Exclusive Brands that continue to grow as a percentage of our overall product mix. This growth is driven by the introduction of new brands, as well as new product lines and brand extensions. Some of the new brands introduced this year included Leona+, Domingo, Design Studio and Delicious. In response to customer feedback, we have recently launched a number of new categories within our Myer Exclusive Brands portfolio including a plus-size range for women, BIB, and for men, Jack Stone. We have also recently launched a range of active wear, Urbane activ and an exclusive range of women’s fashion designed by Jayson Brunsdon, Jayson Brunsdon Black Label. Where possible, we extend our more popular Myer Exclusive Brands into new categories. Some of the brands we expanded in 2011, include: Vue (from Homewares to Furniture); Leona by Leona Edmiston (from Womenswear to Childrenswear as Little Leona and plus sizes as Leona +); and Innovare Made in Italy (from footwear to handbags and wallets). Our best performing Myer Exclusive Brands were Vue (Homewares), Design Studio (Fashion accessories) and Miss Shop (Youth). Having purchased a 65 percent stake in sass & bide, we successfully rolled out the brand to 30 of our stores. Fifteen stores have a full concession offering with the remainder on a wholesale basis. We also welcomed a number of prestigious new Australian designer brands to our concession portfolio including Arthur Galan AG and Simona. The addition of these new brands further strengthens our fashion credentials and adds additional depth to our offer. Our concession business benefited from the addition of new apparel brands including Howard Showers and Metalicus. Concessions that performed well during the year were Sunglass Hut, Karen Millen, Charlie Brown, TS14+, David Lawrence and Cue. We remain the exclusive Australian department store home of major International designers including Balmain, Nina Ricci, Roland Mouret, Givenchy and Temperley London. 01 New brands strengthen our fashion credentials The addition of new brands in 2011 has further strengthened the fashion credentials of the business. In addition to our investment in sass & bide, during the year we purchased the stable of Wayne Cooper brands including Wayne Cooper, Wayne by Wayne Cooper, Wayne Jnr by Wayne Cooper and Brave by Wayne Cooper. We purchased these brands in order to further consolidate our working relationship with this talented designer for the long term. We were delighted to welcome a number of other new brands into Myer stores during 2011. 01 The addition of exciting new brands, including Luke Nguyen cookware, has further enhanced our merchandise offer 02 A number of new Myer Exclusive Brand categories, including a plus-size range for women, BIB, launched successfully in 2011 03 Our Youth category, including T by Bettina Liano, was a strong performer this year 11141_MYER_AR11_Editorial_PPv1.indd 14 10/10/11 11:59 AM 15 nEwnEss, innOvAtiOn, inspiRAtiOn. 02 Other exciting new brands: › A number of new International designers introduced including Catherine Malandrino, The Row, Matthew Williamson Escape, and Lee Anglomania an exclusive denim range from Vivienne Westwood › Gumboots, a fun and affordable collection for boys and girls complementing the existing brand hierarchy, was launched in Myer in Summer 2012 › We have secured the exclusive distribution rights in Australia for the renowned Menswear brand, T.M.Lewin › High profile Australian designer, Fleur Wood, further enhances our womenswear offer with a range of feminine and bohemian designs › We extended our footwear and accessories range international designers with the addition of Stephane Kelian and Balmain › UK fashion brand, Lipsy, launched exclusively in our Miss Shop department for Summer 2012 › Myer is the exclusive department store home of the Luke Nguyen cookware range which was successfully supported by in-store events in 2011 › With a continued focus on ‘fashion meets technology’ the entertainment category, KitchenAid was introduced to the Myer range in 2011 with great success in › We added a number of important menswear brands including Domingo, Cambridge, Le Coq Sportif, Stussy, Deacon, and DKNY › › In home we also added Heritage furniture and launched a very popular range of Delicious cookware and tabletop accessories 03 Following the success of Leona by Leona Edmiston we extended her range into a new range of Childrenswear called Little Leona. › Purebaby, a beautiful collection of organic cotton garments for infants and children which complements the existing brand hierarchy, was launched in Summer 2012 11141_MYER_AR11_Editorial_PPv1.indd 15 10/10/11 11:59 AM 16 M y e r H o l d i n g s liMi t e d Annual Report 2011 Review of Operations continued Marketing An integrated marketing approach In response to rapidly changing technology that encourages innovative ways of communicating with customers, we have successfully adapted our marketing strategy to incorporate online and digital media. While our overall marketing spend remained broadly in line with last year, we have reallocated some advertising spend from traditional advertising channels to MYER one direct campaigns and more digital marketing. Digital and social media An improved e-commerce offering complements our store network. Social media has been embraced as part of everyday marketing with a growing following on Facebook and Twitter. Our customers are also responding positively as we post more engaging video content. Emporium fashion magazine continued to be well received and further digital opportunities exist to leverage the Emporium iPad application. Visual merchandising within all our stores and the iconic Myer store windows continue to set a benchmark. Innovative visual merchandise installations supported the Melbourne store opening and our 2010 Christmas ‘Angels’ campaign was well received by customers. The Angel theme was successfully integrated across all of our marketing channels including in-store displays, TV, print, digital and online. MYER one loyalty program delivers a competitive advantage The MYER one loyalty program achieved a major milestone in 2011 when the number of members exceeded four million. The insights we gain from MYER one data are uniquely valuable in evaluating new brands, new stores, product and services mix, store layouts, as well as marketing and event programs. The number of MYER one email addresses we have registered continued to grow and we now have over 1.69 million email contacts. We continue to reward our MYER one members and we distributed over $48 million in Myer rewards gift cards to members during 2011. We also delighted our top MYER one members with over 1,000 tickets to our key sponsored events. 01 01 In addition to quarterly reward cards, our loyal MYER one customers are rewarded with exclusive events, private sales, preview nights, birthday vouchers and more 02 We provide customer entertainment through vibrant in-store theatre – from the iconic Myer windows, to glamorous fashion parades, to appearances by children’s characters, celebrities and sporting personalities 03 We continue to support the communities in which we operate, sponsoring Fashions on the Field events at over 17 turf clubs across Australia this year 04 Our Designers and Myer Ambassadors helped to celebrate the relaunch of our flagship Melbourne store in March 05 Myer Emporium magazine reached a record advertising spend for the November 2011 edition, demonstrating the attractiveness of the flexible format available in both print and as an iPad application The MYER one affiliates program continued to gain momentum with 325 new outlets signed during 2011, bringing the total number of affiliates to over 1,000 individual locations for affiliates. These affiliates reward their customers with MYER one shopping credits allowing customers to earn MYER one shopping credits from non-Myer retail outlets and services. Some of our new partners include Hertz, Beaurepaires and select Ritchies IGA supermarkets. As we develop our omni-channel strategy our MYER one loyalty program will increasingly prove to be a competitive advantage, particularly with our plans to personalise the myer.com.au website for our members as part of our new web platform. During the year, we increased the range of financial services offered to our customers to include insurance products and the Myer Christmas Club, adding to the existing Myer Visa offer. Strengthening brand awareness Myer has a long history of supporting the community through event sponsorships at a local, regional and national level. Whether on the catwalk at a major fashion festival, trackside at a local race day or on stage for carols at Christmas, we are committed to the communities in which we operate. In March 2011, our iconic flagship Melbourne store was officially reopened with a gala black tie cocktail party as the store also celebrated 100 years of being Melbourne’s favourite department store. During the year, we partnered with 17 turf clubs across Australia and hosted Myer Fashions on the Field competitions at 30 race days. The 48th Myer Fashions on the Field competition at the Melbourne Cup Carnival saw over 1,000 race-goers enter the competition at Flemington in Victoria. We endeavor to complement celebrity appearances at our sponsored events with in-store appearances to drive foot traffic. Successful in-store appearances this year included Jerry Hall, Georgia Jagger, Katy Perry and Lord Wedgwood. 11141_MYER_AR11_Editorial_PPv1.indd 16 10/10/11 11:59 AM 17 02 05 03 04 A fully integrated marketing strategy to communicate with our loyal MYER one members and customers and to engage with our local communities. 11141_MYER_AR11_Editorial_PPv1.indd 17 10/10/11 11:59 AM 18 My er Holdings Annual Report 2011 l i M i ted Review of Operations continued Supply chain & Global Sourcing Offices Supply chain improving speed to market We continued to gain efficiencies from the significant investment we have made over the past five years in our supply chain. Our efficient supply chain ensures that we get on trend and in season fashion to our customers. We reduced shipping lead-times from our Asian hubs to less than 24 days. We continue to leverage our supply chain capability and the ‘quick-ship’ program of our Myer Exclusive Brand furniture ranges has been very well received by customers. The quick ship furniture is held in our distribution centres, ensuring speedy delivery to customers and represents a distinct competitive advantage for Myer. With the support of many of our suppliers we have increased compliance with our ‘floor ready’ standards for merchandise. Merchandise is pre-hung, source tagged and price ticketed requiring minimal packaging. In addition to saving time for our team members when restocking, this initiative also results in reduced packaging. 02 03 11141_MYER_AR11_Editorial_PPv1.indd 18 10/10/11 11:59 AM 19 global Sourcing Offices We opened offices in Shanghai in July and Hong Kong in August to enable us to further develop our direct sourcing capabilities as we grow our Myer Exclusive Brands. The Shanghai office will manage the majority of sourcing from northern China, while the Hong Kong office will manage sourcing from remaining regions and importantly continue to look for new sourcing opportunities in emerging markets. These offices are in addition to our four dedicated hubs in China that are run by Cargo Services. The successful recruitment of over 60 team members ensured the offices immediately started to add value to our buying team. Many of the new team were recruited locally and have extensive experience with top Australian and International retailers. The Myer Board took the opportunity in May to visit the offices and meet with new team members and key suppliers. We have implemented appropriate Quality Assurance and Quality Control policies and procedures. In June, the Board endorsed our Ethical Sourcing Policy. We continue to work with suppliers to improve their social and environmental practices and to assist our suppliers to understand and implement the policy. We are committed to responsible business growth and development, which appropriately considers and addresses the ethical and social implications of our business decisions. More detail about our Sustainability Strategy can be found on pages 20 to 23. 05 01 Our highly-efficient supply chain benefits from strong relationships with our transport and supplier partners 02 Merchandise that arrives ‘floor ready’ delivers significant efficiency benefits and helps to reduce shrinkage 03 The Global Sourcing Offices in Shanghai and Hong Kong support the development of our direct sourcing capabilities and help deliver improved profitability 04 The investment in supply chain ensures the fast transition of merchandise across the distribution centre dock and into stores 05 Our Global Sourcing Offices will enable more efficient and effective sourcing 01 04 11141_MYER_AR11_Editorial_PPv1.indd 19 10/10/11 11:59 AM 20 M y e r H o l d i n g s liMi t e d Annual Report 2011 sustainability Committed to building a socially responsible business At Myer, we are committed to responsible business growth and development. Our Sustainability Strategy is comprised of four key focus areas: people, community, business and environment. People Myer is one of the largest private sector employers in Australia, with over 13,000 team members throughout the country. Our team members are integral to what we do as they interact with our customers every day. Learning and development We are committed to investing in our people to ensure we can develop talent from within the business. Our Store Management Development Program helps build competency among high-potential team members who aspire to leadership positions at Myer. We also have a Graduate Development Program with almost 50 graduates successfully completing the program since 2007. We have strong relationships with universities including RMIT and the Australian Centre for Retail Studies (ACRS) at Monash University. These relationships have led to the employment of talented product development interns from RMIT in our buying and merchandise areas, while many team members have gained valuable insights into key national and international retail trends through international study tours and training seminars, programs conducted by the ACRS. We invest in skills development and leadership programs to ensure that our team members are proud to work at Myer and that they can contribute to the best of their abilities. Team member benefits and wellness With a workforce comprised of almost 80 percent female team members, Myer was proud to be the first major Australian retailer to introduce paid parental leave in 2009. We are committed to helping team members balance work and family responsibilities and encourage a long and fulfilling career at Myer. In 2011, we initiated a Keeping in Touch newsletter to ensure team members on parental leave remain connected with Myer. We have a flexible work policy and are committed to the health and wellness of our people including gym membership at our support office, and access to counselling through the Myer Team Member Support Service. Reward and Recognition The Myer Inspirational People Awards are held in October each year to celebrate the success of individuals and teams who have worked hard to achieve our goals. Our CEO’s High Performers Club and Service Heroes continue to be key elements of our reward and recognition program for store team members. The annual Myer 25 Year Club celebrations are an opportunity to acknowledge the long term service of many individuals to our business and we were proud to induct an additional 150 members to the Club in 2011. The numbers continue to grow demonstrating the commitment and loyalty of our team members. Safety We are committed to safety in all areas of our business and it remains a key performance measure. We maintained a manual handling focus, with training available for team members as well as implementing specific interventions aimed at reducing manual handling risks. Safe Work Australia Week was recognised with a week of activities in our stores and Support Office in October 2010. We have improved our safety hazard identification process in stores and distribution centres. We have a structured safety audit program in place to monitor the performance of our overall safety system. As a result of this focus, we were pleased to deliver ongoing improvements in our safety performance across the business in 2011, with all our safety measures delivering improved results on last year. Lost Time Injury Frequency Rate declined to 11.5, a 20 percent reduction on last year. The hours lost associated with injury also declined by 8 percent. 02 03 11141_MYER_AR11_Editorial_PPv1.indd 20 10/10/11 12:00 PM ” We are committed to making a difference to our local communities and supporting their charities and initiatives. 01 Community 21 ” Our engagement with the local community and continued support of charities and initiatives is a key part of our Sustainability Strategy. During the year, we sponsored Mary Poppins the Musical and the Melbourne Symphony Orchestra, engaging communities, including Bendigo, Ballarat and Geelong. committed to our communities Our team members make a difference to their communities through their active involvement in the Myer Stores Community Fund as well as many local activities. The fund contributes to children, youth and women’s health charities and in 2011 raised over $1.5 million through initiatives and events including the Precious Metal Ball. The fund distributes to over 80 charities nationwide, including the Salvation Army, the Olivia Newton-John Cancer and Wellness Centre, Canteen and the Cancer Council. Our stores enjoy engaging closely with their local communities. In financial year 2011, stores allocated over $1 million to local community initiatives and public events through sponsorship and grants. We continued our partnership with Vision Australia’s Carols by Candlelight, presented by Myer on Christmas Eve in Melbourne. We were delighted to receive the 2011 Vision Australia Award – Corporate, for our ongoing support of the organisation’s important work. Community support of Christmas activities also included events in Melbourne, Hobart, Perth and Brisbane, continuing the tradition of Christmas as an important celebration for Myer and its customers. Since 1993, the ‘Myer Spirit of Christmas’ CD has raised $5.5 million for the Salvation Army, and $650,000 for The Starlight Foundation. In 2010, profits from the CD supported The Salvation Army’s Children and Youth programs. Disaster relief and fundraising support Myer team members demonstrated enormous commitment and determination in response to the natural disasters in Queensland, Victoria and Western Australia in 2011. Team members rallied to help those impacted, offering donations and their own time in support. Myer stores collected funds at POS on behalf of the Premier’s Disaster Relief Appeal in Queensland and the Red Cross Victorian Floods Appeal. Myer provided grants to team members directly impacted and the Myer Family and Friends Flood Relief Fund also provided support. Toowoomba was one of the hardest hit areas in Queensland, and when we reopened our store that had been inundated by floodwaters, we hosted an activity-filled day for the Toowoomba community including an in-store appearance by Jennifer Hawkins. community health Since 2009, we have offered a free breast cancer screening service in select stores in New South Wales. The service is a result of a community partnership with Westmead Breast Cancer Institute (BCI), with funding from the BCI, the Cancer Institute NSW, Sydney West Area Health Service and the NSW Department of Health. Thousands of women have taken advantage of the BCI Sunflower Clinics with convenient locations and extended opening times. 04 01 Community Passion finalists from the 2010 Inspirational People Awards: Charmaine Goodwin, representing Myer Penrith; Karen Raufers, representing Myer Wagga Community Fund; and Di Keogh, the winner, from Myer Marion (left to right) 02 The Myer Stores Community Fund Precious Metal Ball is a highlight of the community calendar and a key annual fundraising event 03 Our buyer in training program helps develop talent within the business with the support of mentors and guidance from senior management 04 We are proud to have been the principal sponsor of the Vision Australia Carols by Candlelight since 2007, celebrated each year at the Sidney Myer Music Bowl in Melbourne 11141_MYER_AR11_Editorial_PPv1.indd 21 10/10/11 12:00 PM 22 My er Holdings Annual Report 2011 l i M i ted sustainability continued Business sustainability In all our business decisions we aim to meet or exceed the expectations of key stakeholders including customers, investors, suppliers and the community. Ethical sourcing Our Ethical Sourcing Policy is based on internationally accepted labour standards, and clearly outlines the standards that all suppliers are required to comply with when producing and supplying merchandise for Myer. As we increase our level of direct sourcing through our Global Sourcing Offices a robust audit framework has been designed to manage supplier compliance with the Policy. Supplier compliance reviews and audits are prioritised based on the perceived level of risk, and may include supplier corrective action plans. Fair trading We are committed to meeting our fair trading compliance obligations, and ensuring team members deal with customers and suppliers in a responsible manner. We have developed a tailored Fair Trading Compliance Program in accordance with Australian Standard 3806, and maintain ongoing fair trading training for team members in stores and the Support Office, particularly in specialist areas such as Buying and Marketing. 02 product responsibility Product quality and safety is carefully managed and monitored by dedicated local and overseas Quality Assurance and Merchandise Compliance teams within our business. We are committed to building quality and safety compliance into all of the products that we source, develop and sell. Products are subject to ongoing safety reviews by a specialist compliance team having regard to all applicable safety standards. governance We aim to maintain appropriate governance standards in our business dealings and to behave with integrity in all interactions with customers, stakeholders, government, team members and the community. All Myer team members, directors and contractors must comply with Myer’s Code of Conduct. Our commitment to Corporate Governance is described in the Corporate Governance Statement on pages 28 to 34 of this report. ” 01 Committed to responsible business growth and development. ” 11141_MYER_AR11_Editorial_PPv1.indd 22 10/10/11 12:00 PM 23 ” An ongoing commitment to energy efficiency and waste management. ” 01 Our Support Office in Docklands, Victoria, has achieved 5 Green Star Office Design rating (V2) from the Green Building Council Australia and was registered for a 5 Green Star As Built (V2) rating 02 We are committed to ensuring the products we sell comply with safety and quality standards 03 Over the past five years we have collected on average 16 million hangers per year for reuse and recycling, reducing our impact on the environment 04 We are committed to ensuring our people, customers, contractors and suppliers are safe at all times through training and safe work practices 03 Environment is an Environmental sustainability integral component of our Sustainability Strategy. We are committed to minimising the impact of our operations on the environment, and raising sustainability awareness amongst our team members and customers. Energy efficiency initiatives Energy efficiency and waste management continues to be a focus for our stores and Support Office. In May 2011, the business committed to a lamp upgrade program to replace current lamps in store to more energy efficient models. The program aims to reduce overall energy consumption and energy costs, improve the quality of lighting in store, and reduce the number of lamp changes and maintenance required. Key environmental and cost saving benefits include: › › Forecast annual savings of 13,400,000+ kWh of energy per annum; Substantial reduction in our carbon footprint by saving in excess of 198 million kWh of C02 emissions, and preventing the disposal of over 970,000 lamps into landfill. waste, recycling and reuse We have a number of programs in store to address waste recycling and reuse programs for paper, cardboard, plastic, hangers, security hard tags, e-waste and textiles. Team members are required to report on the collection of plastic and paper-based recyclable materials. The Hanger Reuse and Recycle Program is monitored to ensure collection and re-use of hangers 04 is occurring in our stores. The Merchandise Protection Hard Tag Reuse and Recycle Program allows tags to be removed at the POS and returned to the supplier for reuse, thereby reducing the number of tags in circulation. The upgrade of our IT infrastructure across our stores delivered benefits to both the business and environment. The e-waste recycling of POS units resulted in over 103 tonnes of material being diverted from landfill. The equipment upgrade has also delivered energy savings. The ‘floor ready’ supply chain initiative has already resulted in a significant reduction in distribution packaging materials and there is potential to improve on these results. In 2011, we supported the Berlei Bra Recycling Program, encouraging customers and team members to donate their unwanted bras. As well as incorporating a benefit to the environment and global community, this was a fundraising initiative for Breast Cancer Network Australia. We also partnered with the NSW Government in the Save Power Retail Program across all NSW stores, promoting the environmental and cost saving benefits of energy efficient appliances. Since 2008 we have been partnering with Sustainability Victoria, in the Resourcesmart Business Program, across all Victorian stores. commitment to Australian packaging covenant In March 2011, we submitted our Five Year Action Plan under the Australian Packaging Covenant (APC), and reaffirmed our commitment to adopting the APC Sustainable Packaging Guidelines and principles of product stewardship. Our Packaging and Recycling Workgroup focuses on identifying and implementing sustainable packaging solutions, minimising waste and optimising reuse and recycling opportunities across the business. 11141_MYER_AR11_Editorial_PPv1.indd 23 10/10/11 12:00 PM 24 M y e r H o l d i n g s liMi t e d Annual Report 2011 Board of Directors 01 02 03 01 Howard McDonald Chairman Independent Non-Executive Director Member of the Board since 6 November 2006 Non-Executive Chairman since 4 August 2009 Member – Nomination and Remuneration Committee Howard brings significant retail and fashion experience to the Myer business with 35 years of experience in consumer goods industries. 04 Howard was previously Managing Director of The Just Group, from December 1997 to September 2006, during which time he repositioned and expanded the Group. In 2001, he led the Just Jeans Group into Australia’s first public to private management buyout and in May 2004 Just Group was re-listed on the ASX. Just Group is the largest specialty apparel retailer in Australasia with over 800 stores. Its stable of brands includes Just Jeans, Jay Jays, Jacqui E, Portmans, Peter Alexander Sleepwear and Dotti. Prior to this, Howard held a number of roles within the Pacific Dunlop Group across Footwear, Clothing and Textiles, and Corporate, including heading up Corporate Affairs for Pacific Dunlop, where he sat on all the Management Boards of this diversified conglomerate. Howard’s time at Pacific Dunlop culminated in the role of Managing Director of Pacific Brands Clothing, where he focused on offshore manufacturing, international marketing and textile manufacturing, managing brands such as Bonds, Holeproof, Berlei, Jockey and others. 05 Howard holds a Bachelor of Economics degree from Monash University and is a Fellow of the Australian Institute of Company Directors. Howard resides in Victoria and is 61 years of age. 06 Other current directorships Howard is currently Chairman of Rodd & Gunn Australia Limited (a Myer supplier) and Rodd & Gunn New Zealand. 02 Bernie Brookes Chief Executive Officer and Managing Director Member of the Board since 12 July 2006 Bernie was appointed Chief Executive Officer and Managing Director of the Myer Group on 2 June 2006. In his role, Bernie has been responsible for the transition of Myer following the separation from the Coles Group and rebuilding the Myer business under new ownership. Bernie has spent 35 years working within the retail industry in local and international roles in India and China. Prior to joining Myer, Bernie was a Management Director of Woolworths and was a chief architect of Woolworths’ Project Refresh, which reduced costs by more than $5 billion over five years and reinvested the savings back into the business. His Woolworths experience also included a variety of general management positions in three states across the Buying, IT, Marketing and Operations departments. Bernie has also held a number of roles as president and executive of various industry organisations including Retail Traders Association in Queensland and Victoria and President of the Queensland Grocery Association. He has assisted on a number of charitable and government ventures and committees. Bernie is currently patron of the Australian Joe Berry Memorial Award and the Australian representative judge of the World Retail Awards. Bernie holds a Bachelor of Arts degree and Diploma of Education from Macquarie University. Bernie resides in Victoria and New South Wales and is 51 years of age. Other current directorships Bernie is a Member of the Advisory Board of First Unity Financial Group. Bernie is also a Director of the Advisory Board of the Salvation Army. 07 11141_MYER_AR11_Editorial_PPv1.indd 24 10/10/11 12:00 PM 04 Tom Flood Independent Non-Executive Director 06 peter Hay Independent Non-Executive Director 25 Member of the Board since 17 March 2009 Member – Audit, Finance and Risk Committee Tom has been a Director of Myer Pty Ltd since 26 July 2007 and a Director of Myer Holdings Limited since 17 March 2009. Tom brings to Myer 39 years of experience in the retail sector, with the majority of his career spent in the supermarket industry. Tom joined Woolworths upon his arrival in Australia. During his time there, Tom assumed the position of General Manager, Supermarkets for Western Australia and subsequently for Victoria (Safeway). In these roles, Tom oversaw all areas of the supermarket business, including buying, marketing, store operations, distribution, finance, security and insurance. Tom was subsequently appointed Chief General Manager Operations for all Woolworths stores in Australia. Following that, Tom was appointed to the role of Director of Supermarkets with overall responsibility for Woolworths’ core supermarkets business. Tom began his retail career in Ireland with the Superquinn Supermarket Group before moving to London for a role with the United States-owned Safeway Supermarket group. Tom resides in Victoria and is 63 years of age. 05 chris Froggatt Independent Non-Executive Director Member of the Board since 9 December 2010 Chair – Nomination and Remuneration Committee Chris Froggatt was appointed as a non-executive director of Myer Holdings Limited in December 2010. Chris has a broad industry background, including consumer branded products, retailing and hospitality, and covering industries such as beverage, food and confectionery through her appointments at Britvic, Whitbread, Diageo and Mars. She has over 20 years’ executive experience as a human resources specialist in leading international companies, including Brambles Industries plc and Brambles Industries Ltd, Whitbread Group plc, Diageo plc, Mars Inc. and Unilever NV. Chris has recently served on the Boards of Britvic plc and Sports Direct International plc and as an independent trustee director of Berkeley Square Pension Trustee Company Limited. Chris holds a Bachelor of Arts (Honours) in English Literature from the University of Leeds (UK). Chris is a Fellow of the Chartered Institute of Personnel Development and a member of the Australian Institute of Company Directors. Chris resides in New South Wales and is 53 years of age. Other current directorships Chris currently serves on the Board of Goodman Fielder Limited. Chris is currently a Non-executive Director on the Board of the Australian Chamber Orchestra. Member of the Board since 3 February 2010 Peter has a strong background in company law and investment banking work, with particular expertise in relation to mergers and acquisitions. He has also had significant involvement in advising governments and government-owned enterprises. Peter was the Chief Executive of law firm Freehills (2000 to 2005) where he had been partner since 1977. Peter holds a Law Degree from the University of Melbourne and is a Fellow of the Australian Institute of Company Directors. Peter resides in Victoria and is 61 years of age. Other current directorships Peter is currently Chairman of Lazard Pty Ltd’s Advisory Board, and a Director of Alumina Limited (since 2002). He is a Director of Australia and New Zealand Banking Group Limited (since 2008), a Director of GUD Holdings Limited (since 2009) and a Director of NBN Co Limited (since 2009). Peter is also a part-time member of the Takeovers Panel (since 2009). Peter is also a Director of Epworth Foundation (since 2008) and Landcare Australia Ltd (since 2008). 07 Rupert Myer AM Independent Non-Executive Director Member of the Board since 12 July 2006 Member – Nomination and Remuneration Committee Member – Audit, Finance and Risk Committee Rupert is Chairman of the Myer Family Company Ltd, an actively managed investment, family office and wealth services group. He was formerly a director of MCS Property Limited. Rupert is a member of the University of Melbourne Faculty of Business and Economics Advisory Board. His previous community activities have been as Chairman of the NGV Foundation, International Social Service and Work Placement and as a board member of The Museum of Contemporary Art and a trustee of The National Gallery of Victoria. He chaired the Federal Government’s Inquiry into the Contemporary Visual Arts and Craft Sector, which completed its report in 2002. Rupert holds a Bachelor of Commerce (Honours) degree from the University of Melbourne and a Master of Arts from the University of Cambridge and is a Fellow of the Australian Institute of Company Directors. He became a Member of the Order of Australia in January 2005 for service to the arts, for support of museums, galleries, and the community through a range of philanthropic and service organisations. Rupert resides in Victoria and is 53 years of age. Other current directorships Rupert is Chairman of the Myer Family Company Ltd and a director of AMCIL Limited and Diversified United Investment Limited. He intends to retire as Chairman of the Myer Family Company Ltd in October 2011, but will remain on the board as a Director. He is Chairman of the National Gallery of Australia and a board member of the National Gallery of Australia Foundation. He also serves as Chairman of Kaldor Public Arts Projects, as a member of the Felton Bequests’ Committee and as a board member of Jawun – Indigenous Corporate Partnerships and The Myer Foundation. 03 Anne Brennan Independent Non-Executive Director Member of the Board since 16 September 2009 Chair – Audit, Finance and Risk Committee Member – Nomination and Remuneration Committee Anne brings to the Myer business strong financial credentials and business experience. Anne has worked in a variety of senior management roles in both large corporates and professional services firms. She has extensive experience in mergers and acquisitions, financial management, treasury, audit, risk management, tax, investor relations and ASX and statutory reporting. During Anne’s executive career, she was the CFO at CSR and the Finance Director at the Coates Group. Prior to her executive roles, Anne was a partner in three professional services firms: KPMG, Arthur Andersen and Ernst & Young. She has more than 20 years experience in audit, corporate finance and transaction services. Anne was also a member of the national executive team and a board member of Ernst & Young. Anne holds a Bachelor of Commerce (Honours) degree from University College Galway. She is a Fellow of the Institute of Chartered Accountants in Australia and a Fellow of the Australian Institute of Company Directors. Anne resides in New South Wales and is 51 years of age. Other current directorships Anne is currently a Director of Argo Investments Limited, Charter Hall Group, Nufarm Limited and Cuscal Limited. She is also a Director of the Australia Ireland Fund and a Councillor of the Australian Institute of Company Directors (NSW). 11141_MYER_AR11_Editorial_PPv1.indd 25 10/10/11 12:00 PM 26 M y e r H o l d i n g s liMi t e d Annual Report 2011 Management team 01 04 07 02 05 08 03 06 09 11141_MYER_AR11_Editorial_PPv1.indd 26 10/10/11 12:00 PM 27 07 Megan Foster Group General Manager Marketing and Brand Development Megan was appointed GGM Marketing and Brand Development in November 2010. Megan is responsible for advertising and direct marketing, visual merchandising, public relations and events, the MYER one loyalty program, Emporium magazine, myer.com.au creative, customer insights and research as well as brand strategy. Megan has 21 years of retail experience and joined Myer in June 2006 as a management consultant. In April 2008, Megan was appointed to the role of Director Store Concepts and Design and as part of this role oversaw the redevelopment of the flagship Myer Melbourne store. 08 Adam Stapleton Group General Manager Merchandise Adam has 16 years of industry experience. Adam was appointed to the role of GGM Merchandise in December 2010 with some adjustments to his portfolio in September 2011. Adam is responsible for Men’s, Home, Furniture, Entertainment, General Merchandise and Toys businesses as well as International and Domestic Logistics, Merchandise Planning and Store and Business Support. Adam joined Myer in 2003, and has held a number of positions including National Manager of Advertising and Loyalty and General Manager Marketing. Prior to joining Myer, Adam worked for a number of organisations across a diverse range of industries, including Kodak, Accenture and ANZ. 09 Marion Rodwell General Counsel and Company Secretary Marion Rodwell is the Company Secretary of the Company. Marion was appointed Group General Counsel and Company Secretary in 2008. Marion has over 20 years of corporate, commercial, litigation and governance experience. Prior to joining Myer, Marion held General Counsel and Company Secretary roles in the financial services, gaming and retail industries, including with Tattersall’s and IOOF. Marion holds a Bachelor of Laws and a Bachelor of Economics from Monash University, and is a member of the Law Institute of Victoria and the Australian Corporate Lawyers Association. In 2010, Marion was awarded ACLA Australian Corporate Lawyer of the Year. 03 Nick Abboud Executive General Manager Stores Nick oversees the operations of the Myer network, including store operational budgeting, workforce planning, store projects and asset protection. Nick’s portfolio also includes Store Development and Information Technology. Nick is responsible for all aspects of Myer’s store operations from conceptualisation to delivery of operational strategies. Nick’s current focus is on improving customer service in all Myer stores. Nick joined Myer in 1993 as a department manager and over the past 17 years has progressed through various store management and regional management roles. 04 greg Travers Executive General Manager Business Services Greg was appointed Myer’s Director of Strategic Planning and Human Resources in June 2006 and then EGM Business Services in November 2010. In his role, Greg oversees all aspects of Myer’s human resources including organisational development, recruitment and training, employee relations, as well as risk, safety and sustainability, corporate affairs, Myer’s program office, various other service functions and the development of Myer‘s strategic planning framework. Greg has over 30 years of industry experience including with WMC Resources Ltd, Pratt Group and BHP. 05 Timothy clark Group General Manager Property, Store Development and Services Tim has 28 years of retail experience and was appointed GGM Property, Store Development and Services in January 2011. He is responsible for overseeing the management of Myer’s existing property network, including the sourcing of new locations that will allow Myer to meet its wider business objectives. He also oversees all in-store design developments, refurbishments and the ongoing facilities management of the current Myer stores assets. In addition, Tim has IT within his portfolio of accountability. 06 Judy coomber Group General Manager Merchandise Judy has over 30 years of retail experience and was appointed to the role of Group Business Manager Fashion and Accessories in 2009 and GGM Merchandise in December 2010, with some adjustments to her portfolio in September 2011. Judy is responsible for overseeing all areas of Womenswear, Miss Shop, Childrens, Intimates, Shoes and Accessories businesses as well as Cosmetics, Global Sourcing Offices, Quality Assurance, Quality Control and Concessions. At Myer, Judy has held a number of roles within stores and in the buying office. Judy has also held senior merchandising roles at Roger David, Hallensteins and the Sportsgirl/ Sportscraft Group. Judy is a former Non-Executive Director of Ezibuy, the largest mail order business in Australasia. 01 Bernie Brookes Chief Executive Officer and Managing Director Bernie was appointed Chief Executive Officer and Managing Director of Myer in June 2006. In his role, Bernie has been responsible for the transition of Myer following the separation from the Coles Group, rebuilding the Myer business under private ownership and now leading Myer as an ASX-listed public company. Bernie has spent 35 years working within the retail industry in local and international roles. 02 Mark Ashby Chief Financial Officer Mark was appointed Chief Financial Officer (CFO) of Myer in January 2008. As CFO, Mark’s responsibilities cover all accounting, treasury management, taxation, compliance and internal audit aspects of the business. In addition Mark has responsibility for Procurement and the Financial Services division of Myer. Prior to joining Myer, Mark was CFO of Mitre 10, the Finance Director of Motorola and a Finance Director in a number of organisations in retail and technology. Mark is a fellow of CPA Australia and a member of the Australian Institute of Company Directors. 11141_MYER_AR11_Editorial_PPv1.indd 27 10/10/11 12:00 PM 28 M Y ER H O LDINGS Annual Report 2011 L I MITED Corporate Governance statement Introduction The Board of Myer Holdings Limited (the Company) is committed to achieving the highest standards of corporate governance. In this statement, the Company and its controlled entities together are referred to as the Group. The Board is concerned to ensure that the Group is properly managed to protect and enhance shareholder interests, and that the Company, its Directors, officers and employees operate in an appropriate environment of corporate governance. The Board has adopted a corporate governance framework comprising principles and policies that are consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (2nd Edition) (ASX Principles). This framework is designed to promote responsible management and assists the Board to discharge its corporate governance responsibilities on behalf of the Company’s shareholders. This statement outlines the Group’s main corporate governance practices and policies in place throughout the financial year and at the date of this report, through discussion of: ʯ ʯ ʯ ʯ the Board of Directors; the operation and responsibilities of the Board Committees; risk management; and the Group’s key corporate governance policies. The policies and charters referred to in this statement are available from the Corporate Governance page in the Investor Centre section of Myer’s website (www.myer.com.au/investor). The Group regularly reviews its policies and charters to ensure that they remain consistent with the Board’s objectives, current laws and best practice. The following table indicates where specific ASX Principles are discussed in this statement. ASX principle Location in corporate governance Statement Principle 1 Lay solid foundations for management and oversight 1.1, 1.4 Principle 2 Structure the board to add value 1.1, 1.2, 1.3, 1.4, 1.6, 1.8, 2.1, 2.2 Principle 3 Promote ethical and responsible decision-making 4.1, 4.3, 4.5 Principle 4 Safeguard integrity in financial reporting 1.6, 2.1, 2.3, 3.3 Principle 5 Make timely and balanced disclosure 4.2 Principle 6 Respect the rights of shareholders 4.4 Principle 7 Recognise and manage risk 3.1, 3.2, 3.4, 3.5 Principle 8 Remunerate fairly and responsibly 1.5, 1.6, 2.1, 2.2, 4.3 part 1 — The Board of Directors Relevant documents ʯ Board Charter and relationship with management ʯ Nomination and Remuneration Committee Charter Available from the Investor Centre section of Myer’s website: www.myer.com.au/investor 1.1 Role and responsibilities of the Board The Board has ultimate responsibility for setting policy regarding the business and affairs of the Company for the benefit of shareholders and other stakeholders. The Board represents and serves the interests of the Company’s shareholders by overseeing and appraising the Company’s strategies, policies and performance. The Board has adopted a Board Charter to provide a framework for its effective operation. The Board Charter outlines the manner in which the Board’s constitutional powers and responsibilities will be exercised and discharged, having regard to principles of good corporate governance, best practice and applicable laws. The Board Charter addresses the following: ʯ ʯ Board composition and process; the role and responsibilities of the Board, Directors, the Chair and the Chief Executive Officer (CEO); ʯ matters specifically reserved for the Board or its Committees; ʯ ʯ the relationship and interaction between the Board and management; and delegation by the Board to Board Committees and management. As set out in the Board Charter, the responsibilities of the Board include: ʯ to monitor corporate performance and the implementation of strategy and policy; to select, appoint and evaluate the performance of, determine the remuneration of, and plan the succession of the CEO; on recommendation of the CEO, to select, appoint and review the performance of the Chief Financial Officer (CFO) and other senior executives; to contribute to and approve management development of corporate strategy, including setting performance objectives and approving operating budgets; to review, ratify and monitor systems of risk management and internal control and ethical and legal compliance; to approve major capital expenditure, acquisitions and divestments, and monitor capital management; to monitor and review management processes; and to develop and review corporate governance principles and policies. ʯ ʯ ʯ ʯ ʯ ʯ ʯ The Board delegates the implementation of the strategic objectives, plans and budgets approved by the Board to the CEO and management. Management are acountable to the Board, and are required to provide the Board with information in a form, timeframe and quality that enables the Board to discharge its duties effectively. Directors are entitled to request additional information at any time that they consider appropriate. The roles of CEO and Chairman are not exercised by the same individual. The roles of CEO and Chairman are separate, and the Board Charter sets out clear responsibilities for each office. The Chairman is responsible for: ʯ representing the Board to shareholders and communicating the Board’s position; providing leadership to the Board to ensure that it operates efficiently and effectively; ensuring that the Board’s decisions have been implemented; ensuring that the Board fulfils its obligations under the Board Charter and as required under relevant legislation; and promoting constructive and respectful relationships between the Board and management. ʯ ʯ ʯ ʯ The Board approves corporate objectives for the CEO to satisfy and, jointly with the CEO, develops the duties and responsibilities of the CEO. The CEO is responsible for: ʯ managing the Company as directed by the Board; and ʯ implementing strategic objectives, plans and budgets approved by the Board. 11141_MYER_AR11_Editorial_PPv1.indd 28 10/10/11 12:00 PM 29 1.2 Composition of the Board The Board comprises seven Directors. The majority of the Board, including the Chairman, are independent Non‑Executive Directors. Name Howard McDonald Bernie Brookes Anne Brennan Tom Flood Chris Froggatt Peter Hay Rupert Myer Position Appointed Chairman, Independent Non‑Executive Director 6 November 20061 CEO and Managing Director Independent Non‑Executive Director Independent Non‑Executive Director Independent Non‑Executive Director Independent Non‑Executive Director Independent Non‑Executive Director 12 July 2006 16 September 2009 17 March 20092 9 December 2010 3 February 2010 12 July 2006 1 H McDonald was appointed a Director on 6 November 2006, and Chairman on 4 August 2009. 2 T Flood was appointed a Director of Myer Pty Ltd in 2007. Ms Froggatt was appointed as Director with effect from 9 December 2010. All other Directors served as directors for the entire reporting period. Details of the qualifications, experience and special responsibilities of each current Director are set out on pages 24 to 25 of the Annual Report. The Company’s Constitution states that the minimum number of Directors is four and the maximum is fixed by the Directors but may not be more than 12. Directors may be appointed to the Board to fill casual vacancies and are elected at Annual General Meetings of the Company. The Board, together with the Nomination and Remuneration Committee, reviews the composition of the Board and the skills and experience of the Directors. It is intended that the Board will comprise a majority of independent Non‑Executive Directors and Directors from a diverse range of backgrounds, with complementary skills and experience. This will ensure that the composition of the Board reflects a range of independence, expertise and experience appropriate to the Group’s business and strategy. The Board is considering the appointment of a new Director in the future to further enhance the skills and experience of the Board. 1.3 Directors’ independence The Board considers the independence of its Non‑Executive Directors each year. Guidelines and materiality thresholds for determining independence The Board Charter sets out guidelines and materiality thresholds that the Board has adopted to assist in determining the independence of Directors. The Board only considers Directors to be independent where they are independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with, the exercise of their unfettered and independent judgement. As a guideline for determining the independence of Directors, the Board has adopted a definition of independence that is based on that set out in Box 2.1 of the ASX Principles. In general, Directors will be considered to be independent if they are not members of management and they: › are not a substantial shareholder of the Company, or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; have not, within the last three years, been employed in an executive capacity by the Company or another Group member; except in connection with reorganisations within the Group, have not within the last three years been a principal or employee of a material professional adviser or a material consultant to the Company or another Group member; are not a material supplier to, or customer of the Company or another Group member or an officer of or otherwise associated directly or indirectly with a material supplier or customer of the Company; and have no material contractual relationship with the Company or another Group member, other than as a Director of the Company. › › › › The Board considers thresholds of materiality for the purposes of assessing ‘independence’ on a case‑by‑case basis, having regard to both quantitative and qualitative principles. Without limiting the Board’s discretion, the Board has adopted the following guidelines: › The Board will determine the appropriate base to apply (e.g. revenue, equity or expenses) in the context of each situation. In general, the Board will consider an affiliation with a business that accounts for less than 5% of the relevant base to be immaterial for the purposes of determining independence. Where this threshold is exceeded, the Board will review the materiality of the particular circumstance. The Board will review any holding of 5% or more of the Company’s shares, and will generally consider a holding of 10% or more of the Company’s shares to be material. › › At the same time, the Board will undertake a qualitative assessment of independence, which is an overriding requirement for independence. Specifically, the Board will consider whether there are any factors or considerations which may mean that the Director’s interest, business or relationship (even if it does not trigger the quantitative requirements discussed above) could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company. Assessment of the independence of the Company’s Directors The Board is currently made up of seven Directors, six of whom are Non‑Executive Directors. At the date of signing the Directors’ Report, it is the Board’s view that each of its Non‑Executive Directors is independent. Directors did not participate in deliberations or vote in relation to their own independence. Details of the relationships affecting Directors’ independence and their independent status are set out below. Howard McDonald Mr McDonald was appointed a Director of the Company in November 2006 and Chairman in August 2009. Prior to the public listing of the Company on 2 November 2009, the Company was owned by a private consortium. Mr McDonald provided certain consultancy services to that consortium from October 2006 to March 2009. The consultancy services were limited to women’s fashion brand development. The Company was privately owned during the period that Mr McDonald provided these services. Further, Mr McDonald has not had any relationship with the private consortium since the listing of the Company, and Mr McDonald’s involvement with the Company has been entirely in his capacity as a Non‑Executive Director and Chairman. In light of the status of these arrangements, when considering Mr McDonald’s independence, the Board considered that the prior arrangements did not impact on his independence. 11141_MYER_AR11_Financials_PPv1.indd 29 10/10/11 10:57 AM 30 M y e r H o l d i n g s liMi t e d Annual Report 2011 Corporate Governance Statement continued Mr McDonald is currently the Chairman and a shareholder of Rodd & Gunn Australia Limited, a Myer supplier. For the financial year ended 30 July 2011, the percentage of the Group’s total sales value represented by Rodd & Gunn was less than 0.5%. The total sales are significantly below the relevant quantitative materiality threshold adopted by the Board as a guideline for director independence, as set out above. Consistent with the Board Charter, in addition to this quantitative assessment, the Board has also considered qualitative factors relevant to Mr McDonald’s independence. Having considered these quantitative and qualitative principles, the Board considers that Mr McDonald’s relationship with Rodd & Gunn is not material to his independence. Mr McDonald was a director of the General Pants Group until 22 June 2011. The General Pants Group is a competitor of Myer. However, the Board has had regard to the quantitative and qualitative principles outlined in the Board Charter and considers that Mr McDonald’s previous relationship with the General Pants Group is not material to his independence. Appropriate governance arrangements are also in place to ensure that Mr McDonald does not participate in any deliberations or matters brought before the Board that relate directly to Rodd & Gunn or the General Pants Group. If the Board were to consider such matters, Mr McDonald would leave the Board meeting. Having regard to all of the above, the Board has determined that Mr McDonald is an independent director. Tom Flood Mr Flood was appointed a director of Myer Pty Ltd in July 2007, and a Director of the Company on 17 March 2009. Mr Flood provided consultancy services under an agreement with the Company’s former owners one day per week during the period from July 2007 to March 2008. The services were provided during the period that the Company was privately owned, and pre‑date the public listing of the Company. The consultancy services were limited to a specific function in overseeing the work performed by management on the ‘Store of the Future’ project. This project is now complete. Since the public listing of the Company, Mr Flood’s involvement with the Company has been entirely in his capacity as a Non‑Executive Director. Since this time, Mr Flood has not had any relationship with the private consortium that previously owned the Myer business. In light of the status of these arrangements, when considering Mr Flood’s independence, the Board considered that the prior arrangements did not impact on his independence. Having regard to the above and the quantitative and qualitative principles as set out in the Board Charter, the Board has determined that Mr Flood is an independent director. 1.4 Performance assessments Review of the Board, Committees and individual Directors The Board recognises that regular reviews of its effectiveness and performance are key to the improvement of the governance of the Company. Accordingly, the Board, with the assistance of the Nomination and Remuneration Committee as required, undertakes an annual review and evaluation of the performance of the Board (including against the requirements of the Board Charter), its Committees and each individual Director. The Chairman and the Company Secretary are responsible for the annual review and evaluation. The review and evaluation that has been undertaken by the Board is described below. During the reporting period, the Board, together with the Nomination and Remuneration Committee, reviewed the skills represented by the Directors on the Board, and whether the composition and mix of those skills remain appropriate for the Company. The Board also reviewed the composition of each Board Committee. During the financial year, the structure of the Nomination and Remuneration Committee was revised, and it was decided to retain four (previously three) Committee members. Following the review described above, Ms Froggatt was appointed as an independent Non‑Executive Director of the Company with effect from 9 December 2010. Ms Froggatt has extensive executive experience as a human resources specialist in leading international companies. Ms Froggatt was also appointed as Chair of the Nomination and Remuneration Committee. In addition to evaluating structure and composition, the Board and each Board Committee reviewed their functions and responsibilities. Following this evaluation, the Board and each Board Committee adopted revised Charters in October 2010. The Board and each Board Committee conducted a review of their effectiveness and performance in September 2011. In addition, the Board assessed the relationship and interaction between the Board and management. During the reporting period, the Chairman conducted the annual review of individual Directors. Each Director completed a Board Review and Assessment Document and met privately with the Chairman to discuss the assessment. In addition to the annual review, the Chairman regularly provides informal feedback to individual Directors. The Nomination and Remuneration Committee assists in developing and implementing plans for identifying, assessing and enhancing director competencies. As part of this development, in August 2011, the Directors participated in a workshop specifically tailored for the Company in relation to corporate governance. Review of senior executives The Nomination and Remuneration Committee is responsible for the review of the senior management assessment processes from time to time to ensure that they remain consistent with the Board’s overall objectives for the business. All senior executives undergo a performance and development review on an annual basis. This review process involves the following: › each senior executive is assessed against a set of key performance criteria. These criteria include both financial and non‑financial performance measures; at the end of each financial year, all senior executives meet with their manager to discuss their performance over the previous year; and upon the completion of the performance appraisal meeting, each senior executive is provided with feedback on their performance and a rating is determined based on that performance. As well as the review of performance, where appropriate, a development plan is also agreed to support the ongoing contribution of the executive to the needs of the business. › › A performance evaluation for senior executives which accords with the process described above has taken place during this reporting period. It is the role of the Board to review the performance of the CEO and to review the assessments made by the CEO of the performance of his direct reports. On 10 August 2011, the Company announced the renewal of Bernie Brookes’ contract as the Company’s CEO and Managing Director until 31 August 2014. An important component of this decision was the Board’s assessment of Mr Brookes’ performance as CEO. Further information about the renewal of Mr Brookes’ contract is set out at page 44 of this Annual Report. 1.5 Remuneration arrangements The remuneration of each Director is set out in the Remuneration Report, which forms part of the Directors’ Report and is presented on pages 40 to 53. The Company distinguishes the structure of Non‑Executive Directors’ remuneration from that of Executive Directors and senior executives. The Company does not have any schemes for retirement benefits for Non‑ Executive Directors. Please refer to the Remuneration Report for further information. 11141_MYER_AR11_Financials_PPv1.indd 30 10/10/11 10:57 AM 31 2.1 Introduction The Board has established two Committees to assist in the execution of its duties and responsibilities, and to allow detailed consideration of complex issues. The current Board Committees are: › › the Nomination and Remuneration Committee; and the Audit, Finance and Risk Committee. Board Committee membership is restricted to Non‑Executive Directors. The current members of both Committees are all independent Non‑Executive Directors. Each Committee has a written Charter that sets out its role and responsibilities, composition, membership requirements, and the manner in which the Committee is to operate. Each Committee chair provides reports to the full Board. Minutes of Committee meetings are presented at the subsequent Board meeting. All Directors are permitted, within the Board meeting, to request information of the chair or members of the Committees. All Directors are invited to attend Committee meetings. 2.2 Nomination and Remuneration Committee Composition Chair Chris Froggatt (appointed Chair of the Committee on 16 March 2011) Members Anne Brennan Howard McDonald Rupert Myer (Chair of the Committee until 16 March 2011) Details of Committee members’ attendance at Nomination and Remuneration Committee meetings are set out in the Directors’ Report, at page 36. Role and responsibilities — nomination The nomination responsibilities of the Committee include: › to review and recommend to the Board the size and composition of the Board, including recommendations for the appointment and re‑election of directors, and review of Board succession plans and the succession of the Chairman and CEO; to review and recommend to the Board the criteria for Board membership, including assessment of necessary and desirable competencies of Board members; to assist the Board to assess the performance of the Board, its Committees and individual Directors, and in developing and implementing plans for identifying, assessing and enhancing director competencies; and to review and make recommendations to the Board in relation to any corporate governance issues as requested by the Board from time to time. › › › Appointment of new directors The Committee’s Charter includes the Company’s policy and procedure for selection and appointment of new directors. The Charter sets out factors to be considered when reviewing a potential candidate for Board appointment, including: › the skills, experience, expertise and personal qualities that will best complement Board effectiveness; the capability of the candidate to devote the necessary time and commitment to the role; and potential conflicts of interest, and independence. 1.6 Board and Board Committee meetings The number of meetings of the Board and of each Board Committee held during the period ended 30 July 2011, and the number of meetings attended by each Director and Committee member is set out in the Directors’ Report, at page 36. When reviewing a potential candidate for Board appointment, the Nomination and Remuneration Committee will consider the capability of the candidate to devote the necessary time and commitment to the role. 1.7 Company Secretary The Company Secretary plays an important role in supporting the effectiveness of the Board by monitoring that Board policy and procedures are followed, and co‑ordinating the completion and despatch of Board agendas and materials in a timely manner. The Company Secretary is also responsible for communication with regulatory bodies and the ASX, and all statutory and other filings. All Directors have direct access to the Company Secretary. Marion Rodwell is the Company Secretary of the Company. Her experience and qualifications are set out on page 27 of the Annual Report. 1.8 Independent professional advice The Board collectively and each Director individually are entitled to seek independent professional advice at the Company’s expense in connection with their duties and responsibilities, subject to the approval of the Chairman or the Board. Each of the Board Committees is entitled to seek independent professional advice on any matter pertaining to the powers, duties or responsibilities of the Committee. 1.9 Term of office In accordance with the ASX Listing Rules and the Company’s Constitution, all Non‑Executive Directors must retire from office no later than the third Annual General Meeting following their last election. Where eligible, a Director may stand for re‑election. The CEO is not required to retire by rotation. 1.10 Induction and education New Directors are provided with a letter of appointment setting out the Company’s expectations, their responsibilities and rights and the terms and conditions of their tenure. All new Directors and senior executives participate in an induction program. The Directors’ program specifically covers the operation of the Board and its Committees and financial, strategic, operations and risk management issues, which enables new Directors to actively participate in decision‑making as soon as possible. In addition, the Company arranges continuing education and training for the Directors. The Nomination and Remuneration Committee is responsible for ensuring that an effective induction process is in place for any newly appointed Director, and to regularly review the effectiveness of that process. Part 2 — Operation and Responsibilities of Board Committees Relevant documents Board Charter and relationship with management › › Nomination and Remuneration Committee Charter › Audit, Finance and Risk Committee Charter (including External Audit Policy) › › Available from the Investor Centre section of Myer’s website: www.myer.com.au/investor All Directors are provided with detailed information about potential candidates, and an offer of a Board appointment may only be made after consultation with all Directors. 11141_MYER_AR11_Financials_PPv1.indd 31 10/10/11 10:57 AM 32 M y e r H o l d i n g s liMi t e d Annual Report 2011 Corporate Governance Statement continued Role and responsibilities — remuneration The remuneration responsibilities of the Committee include: › to review and recommend arrangements for the CEO, executives reporting to the CEO, and senior management; to review major changes and developments in the Company’s remuneration, recruitment, retention and termination policies and procedures for senior management, remuneration policies, superannuation arrangements, human resource practices and employee relations strategies for the Group; to review the senior management performance assessment processes, and the annual results of those assessments; in respect of the Company’s employee equity incentive plans, to : – review and recommend to the Board major changes or developments to the plans; – review and determine performance hurdles, eligibility criteria, and terms of offers; and – administer the operation of the plans; to review and recommend to the Board the remuneration arrangements for the Chairman and the Non‑Executive Directors; to review and recommend to the Board the remuneration report; and to review and facilitate shareholder and other stakeholder engagement in relation to the Company’s remuneration policies and practices. › › › › › › Remuneration policies In discharging its responsibilities, the Committee must have regard to the following policy objectives: › to ensure that the Company’s remuneration structures are equitable and aligned with the long‑term interests of the Company and its shareholders; to attract and retain skilled executives; to structure short and long‑term incentives that are challenging and linked to the creation of sustainable shareholder returns; and to ensure any termination benefits are justified and appropriate. › › › 2.3 Audit, Finance and Risk Committee Composition Chair Anne Brennan Members Tom Flood Rupert Myer All members of the Committee are financially literate and have an appropriate understanding of the industries in which the Group operates. Details of Committee members’ attendance at Audit, Finance and Risk Committee meetings are set out in the Directors’ Report, at page 36. Role and responsibilities The Committee’s key responsibilities and functions are to: › oversee the Company’s relationship with the external auditor and the external audit function generally; oversee the Company’s relationship with the internal auditor and the internal audit function generally; oversee the preparation of financial statements and reports; › oversee the Company’s financial controls and systems; and › › manage the process of identification and management of risk. › Further information about the Company’s risk management framework, external auditor, internal audit, and Board assurances on financial reporting risks is set out in Part 3. Rights of access and authority The Committee has rights of access to management and to auditors (external and internal) without management present, and rights to seek explanations and additional information from both management and auditors. Whilst the internal audit function reports to senior management, it is acknowledged that the internal auditors also report directly to the Committee. In addition, the Committee is entitled to seek independent professional advice (discussed at section 1.8 above). Part 3 — Risk management Relevant documents › › Risk Management Policy Audit, Finance and Risk Committee Charter (including External Audit Policy) Available from the Investor Centre section of Myer’s website: www.myer.com.au/investor 3.1 Recognition and management of risk The Company recognises risk management as an integral component of good corporate governance and fundamental in achieving its strategic and operational objectives. The Board is ultimately responsible for identifying and assessing internal and external risks that may impact the Company in achieving its strategic objectives. The Board is responsible for determining the Company’s risk appetite, overseeing the development and implementation of the risk management framework and maintaining an adequate monitoring and reporting mechanism. The Board has delegated coordination of risk oversight to the Audit, Finance and Risk Committee. The Committee’s risk management responsibilities are to review and report to the Board as to whether: › the Company’s ongoing risk management program effectively identifies all areas of potential risk; adequate policies and procedures have been designed and implemented to manage identified risks; a regular program of audits is undertaken to test the adequacy of and compliance with prescribed policies; and proper remedial action is undertaken to redress areas of weakness. › › › The Company has adopted a Risk Management Policy that applies to all Group employees, and to contractors and consultants working on behalf of the Group. Management monitor and report on material risks identified through the internal and external audit process. 3.2 Risk management framework The Company has adopted an enterprise‑wide framework that incorporates a system of risk oversight, risk management and internal control designed to identify, assess, monitor and manage risks consistent with the Australia/ New Zealand Standard (AS/NZ 4360) for Risk Management and Committee of Sponsoring Organizations. The Company applies risk management in a well‑defined, integrated framework that promotes awareness of risks and an understanding of the Company’s risk tolerances. This enables a systematic approach to risk identification, leverage of any opportunities and provides treatment strategies to manage, transfer and avoid risks. The Board reviews and approves the risk management framework and risk appetite on an annual basis. 3.3 External auditor The Audit, Finance and Risk Committee is responsible for overseeing the Company’s External Audit Policy. The Committee has the responsibility and authority for the appointment, removal or reappointment and remuneration of the external auditor, as well as evaluating its effectiveness and independence. The Committee reviews the appointment of the external auditor annually after completion of the year‑end audit. In addition, the Committee reviews and assesses the independence of the external auditor, including any relationships with the Company or any other entity that may impair, or appear to impair, the external auditor’s independent judgement or independence in respect of the Company. The external audit engagement partner is required to rotate at least once every 5 years. PricewaterhouseCoopers (PwC) was reappointed as the external auditor in 2009. 11141_MYER_AR11_Financials_PPv1.indd 32 10/10/11 10:57 AM 33 4.2 Continuous disclosure The Company’s policy is to strictly comply with its obligations under the Corporations Act 2001 and the ASX Listing Rules to keep the market fully informed of information which may have a material effect on the price or value of the Company’s shares. The Company discharges these obligations by releasing information in ASX announcements and by disclosure of other relevant documents to shareholders (eg, annual reports). The Company’s Continuous Disclosure Policy is designed to ensure the timely release of material price‑sensitive information to the market. This policy establishes procedures to ensure that Directors and management are aware of the Company’s disclosure obligations and procedures, and have accountability for the Company’s compliance with those obligations. The Company provides continuous disclosure training to all Directors and senior management. All general managers and divisional heads are required to have appropriate procedures in place within their areas of responsibility to ensure that all relevant information is reported to them immediately to be considered in accordance with the Continuous Disclosure Policy. It is a standing agenda item at all Board meetings, Board Committee meetings and senior management meetings to consider whether any matters reported to or discussed at the meeting should be disclosed to the market pursuant to the Company’s continuous disclosure obligations. The Company has established a Continuous Disclosure Committee, which is constituted by: the CEO; › the CFO; and › the General Counsel and Company Secretary. › The role of the Continuous Disclosure Committee is to: › review all potentially material price‑sensitive information of which management or the Board becomes aware; determine whether any of that information is required to be disclosed to the ASX; and coordinate the actual form of disclosure with the relevant members of management. › › In addition, the Committee will review and respond to any infringement notice or written statement of reasons issued by ASIC. The Company has nominated the Company Secretary as the person with the primary responsibility for all communication with the ASX. All deliberations of the Committee are shared without delay with the Chairman or, in the Chairman’s absence, the Chair of the Audit, Finance and Risk Committee. 4.3 Securities trading The Company had adopted Guidelines for dealing in securities (Guidelines) that apply to all Directors and employees of the Group. The purpose of the Guidelines is to: › explain the types of conduct prohibited under the Corporations Act 2001 in relation to dealing in securities; and establish a best practice procedure for dealing in the Company’s securities. The external auditor will attend the Annual General Meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report. 3.4 Internal audit A separate internal audit division has been established and is overseen by an Assurance Manager who reports through to the CFO and liaises directly with the Audit, Finance and Risk Committee. The internal audit division carries out regular systematic monitoring of control activities and reports to relevant business unit management and the Audit, Finance and Risk Committee. 3.5 Board assurances on financial reporting risks The Board has received assurance from the CEO and the CFO that the declaration provided in accordance with section 295A of the Corporations Act 2001 is founded on a sound system of risk management and internal compliance and control systems, and that the systems are operating effectively in all material respects in relation to financial reporting risks. › The CEO and CFO made declarations to the Board to the following effect: that the Group’s financial statements and notes present a true and fair › view of the financial condition and the performance of the Company and the Group and are in accordance with the Corporations Act 2001 and relevant accounting standards; that the above statement is founded on a sound system of risk management and internal compliance and control systems which implement the policies adopted by the Board (either directly or through delegation to senior executives); and that the Company’s risk management and internal compliance and control systems, to the extent they relate to financial reporting, are operating efficiently and effectively in all material respects. › Part 4 — Key corporate governance policies Relevant documents Code of Conduct › › Continuous Disclosure Policy › Guidelines for Dealing in Securities › Shareholder Communication Strategy Available from the Investor Centre section of Myer’s website: www.myer.com.au/investor 4.1 Code of Conduct The Company aims to maintain the highest standards of ethical behaviour in conducting business and to behave with integrity in all dealings with customers, shareholders, government, employees and the community. All Group employees, Directors and contractors must comply with the Company’s Code of Conduct (Code). The objectives of the Code are to: › › provide benchmark for professional behaviour throughout the Group; support the Group’s business reputation and corporate image within the community; and › make Directors and employees aware of the consequences if they › breach the Code. The Code outlines how the Group expects its Directors and employees to behave and conduct business in a range of circumstances, including actual or potential conflicts of interest. The Code requires awareness of, and compliance with, laws and regulations relating to the Group’s operations, including fair trading, occupational health and safety, privacy and employment practices. The Code encourages employees to report unethical practices within the Group, or breaches of the Code. The Company has ‘whistleblower’ protections for those who report unacceptable behaviour in good faith. As an overriding principle, Directors, employees and their associates must not deal in the Company’s securities if they are in possession of price sensitive or ‘inside’ information. In addition, Directors, specified senior executives and their associates (Relevant Persons) must not deal in the Company’s securities during ‘blackout periods’. Relevant Persons are permitted to deal in the Company’s securities during certain ‘trading windows’, subject to complying with notification requirements. ‘Trading windows’ include periods following the release of the Company’s half year and full year results, and the Annual General Meeting. Outside of trading windows, Relevant Persons may only deal in the Company’s securities in exceptional circumstances subject to obtaining prior approval in accordance with the Guidelines. 11141_MYER_AR11_Financials_PPv1.indd 33 10/10/11 10:57 AM 34 M y e r H o l d i n g s liMi t e d Annual Report 2011 Corporate Governance Statement continued The Guidelines prohibit Directors and senior executives from entering into hedging arrangements with respect to securities in the Company (including any shares, options and rights). Hedging arrangements include entering into transactions in financial products that operate to limit the economic risk associated with holding Company securities. 4.4 Shareholder communication The Company aims to ensure that shareholders are kept informed of all major developments affecting the state of affairs of the Company. The Company aims to promote communication with shareholders and to encourage effective participation at general meetings of the Company. Additionally, the Company recognises that potential investors and other interested stakeholders may wish to obtain information about the Company. The Company’s Shareholder Communication Strategy sets out how the Company communicates information to shareholders and other stakeholders through a range of forums and publications. One of the Company’s key communication tools is the Myer website (www.myer.com.au). Information available on the Investor Centre section of the Myer website (www.myer.com.au/investor) includes: › › the Company’s ASX announcements; key corporate governance documents (including Board and Board Committee Charters, and key policies); financial reports and investor presentations; and information about the Company’s Annual General Meeting (including the Notice of Meeting, and a webcast of the meeting). › › The Company provides a telephone helpline facility and an online email enquiry service to assist shareholders with any queries. Information is also communicated to shareholders via periodic mail‑outs, or by email to shareholders who have provided their email address. 4.5 Diversity The Board is committed to creating a fair and inclusive environment that embraces diversity and recognises its contribution to the Company’s commercial success. The Board acknowledges the inclusion of diversity recommendations in the ASX Principles. The Company reports annually to the Federal Government Equal Opportunity for Women Agency (the Agency) in respect of gender and diversity in the Company. In our most recent report to the Agency, we focussed on diversity issues concerning the representation of women in management roles across the business, recruitment and development initiatives and workplace flexibility, particularly having regard to flexibility related to meeting parenting challenges as well as return to work arrangements for those employees who have taken parental leave. Myer has recently joined with other businesses to commit to the challenge of providing work opportunities for Indigenous Australians and are examining the development of our ‘volunteering’ policy. The Board believes that diversity will be reflected in a range of initiatives we undertake including those mentioned above. The Company will draw from its existing reporting obligations as well as a range of these other initiatives in developing appropriate objectives in respect of diversity, and will provide a more detailed report on diversity in our 2012 Annual Report. 11141_MYER_AR11_Financials_PPv1.indd 34 10/10/11 10:57 AM 35 Directors’ Report Your Directors present their report on the consolidated entity consisting of Myer Holdings Limited (the Company) and the entities it controlled (collectively referred to as the Group) at the end of, or during, the period ended 30 July 2011. 1. Directors The following persons were Directors of the Company during the financial year and up to the date of this Directors’ Report: Director Position Date appointed as Director Howard McDonald Chairman, Independent Non‑Executive Director Bernie Brookes CEO and Managing Director Anne Brennan Independent Non‑Executive Director Tom Flood Independent Non‑Executive Director Chris Froggatt Independent Non‑Executive Director Peter Hay Independent Non‑Executive Director Rupert Myer Independent Non‑Executive Director 1 H McDonald was appointed a Director on 6 November 2006, and Chairman on 4 August 2009. 2 T Flood was appointed a director of Myer Pty Ltd in 2007. 6 November 20061 12 July 2006 16 September 2009 17 March 20092 9 December 2010 3 February 2010 12 July 2006 Ms Froggatt was appointed as Director with effect from 9 December 2010. All other Directors served as directors of the Company for the whole financial year and until the date of this Directors’ Report. Details of the qualifications, experience and special responsibilities of each current Director are set out on pages 24 to 25 of the Annual Report. 2. Directorships of other listed companies The following table shows, for each person who served as a Director during the financial year and up to the date of this Directors’ Report, all directorships of companies that were listed on the ASX, other than the Company, since 31 July 2008, and the period for which each directorship has been held. Director Howard McDonald Bernie Brookes Anne Brennan Tom Flood Chris Froggatt Peter Hay Rupert Myer Listed entity Period directorship held Nil Nil Charter Hall Group Nufarm Limited Argo Investments Limited Nil Goodman Fielder Limited Alumina Limited Australia and New Zealand Banking Group Limited GUD Holdings Limited AMCIL Limited Diversified United Investment Limited – – October 2010 – present February 2011 – present September 2011 – present – August 2009 – present December 2002 – present November 2008 – present May 2009 – present January 2000 – present November 2002 – present 11141_MYER_AR11_Financials_PPv1.indd 35 10/10/11 10:57 AM 36 My er Holdings Annual Report 2011 l i M i ted Directors’ Report continued 3. Meetings of Directors and Board Committees The number of meetings of the Board of Directors and of each Board Committee held during the period ended 30 July 2011, and the numbers of meetings attended by each Director and each Board Committee member is set out below. Full meetings of Directors Audit, Finance and Risk Committee meetings Nomination and Remuneration Committee meetings Director Howard McDonald Bernie Brookes Anne Brennan Tom Flood Chris Froggatt1 Peter Hay Rupert Myer A 14 14 14 13 8 13 14 B 14 14 14 14 8 14 14 A – – 4 4 – – 4 B – – 4 4 – – 4 A 7 – 7 – 2 – 7 B 7 – 7 – 2 – 7 1 C Froggatt was appointed Director on 9 December 2010, and was appointed to the Nomination and Remuneration Committee on 16 March 2011. A = Number of meetings attended B = Number of meetings held during the time the Director held office or was a member of the Committee during the year 4. Directors’ relevant interests in shares The following table sets out the relevant interests that each Director has in the Company’s ordinary shares as at the date of this Directors’ Report. No Director has a relevant interest in a related body corporate of the Company. Director Howard McDonald Bernie Brookes1 Anne Brennan Tom Flood Chris Froggatt Peter Hay Rupert Myer Relevant interest in ordinary Shares Options over ordinary shares 2,074,390 11,460,077 53,658 400,000 10,040 12,195 725,710 Nil 7,380,394 Nil Nil Nil Nil Nil 1 The options held by B Brookes were granted under the Company’s long term incentive plan. Please refer to the Remuneration Report for further information. 5. Company Secretary Marion Rodwell is the Company Secretary of the Company. She was appointed Group General Counsel and Company Secretary in 2008. Ms Rodwell’s experience and qualifications are set out on page 27 of this Annual Report. 6. Principal activities During the financial year, the principal activity of the Group was the operation of the Myer department store business. 11141_MYER_AR11_Financials_PPv1.indd 36 10/10/11 10:57 AM 37 7. Review of operations 10. Matters subsequent to the end of financial year The Group’s financial and operational highlights are set out on pages 4 to 5. A detailed review of the Group’s operations for the financial year and the results of those operations is set out on pages 6 to 23 of this Annual Report. 8. Business strategies and future developments The Group’s strategic plan is set out on pages 2 to 3 of this Annual Report. No matter or circumstance has arisen since the end of the financial year which has not been dealt with in this Directors’ Report or the Financial Report, that has significantly affected, or may significantly affect: (a) the Group’s operations in future financial years; or (b) the results of those operations in future financial years; or (c) the Group’s state of affairs in future financial years. Discussion of the Group’s business strategies and comments on likely developments in the Group’s operations are included on pages 2 to 23. 11. Dividends The following dividends have been paid to shareholders during the financial year: More detailed information relating to the Group’s business strategies, likely developments in the Group’s operations, the expected future results of those operations, and the Group’s prospects for future financial years has not been included in this Directors’ Report. The Directors believe that the inclusion of such information would be likely to result in unreasonable prejudice to the Group. 2010 Final Dividend Final dividend for the period ended 31 July 2010 of 11.5 cents per fully paid ordinary share, fully franked, paid on 4 November 2010 9. Significant changes in the state of affairs 2011 Interim Dividend The following significant changes to the Group’s state of affairs have occurred since the commencement of the financial year: › › › › › a challenging retail environment; the establishment of Global Sourcing Offices in Hong Kong and Shanghai; the acquisition of a 65% shareholding in sass & bide; the renewal of Mr Brookes’ contract as CEO; and the successful refinancing of debt facilities, with improved interest margins and strong support from lenders. These matters are discussed on pages 2 to 23, and 44 of this Annual Report. Other than the above, there were no significant changes in the state of affairs of the Group during the financial year or up to the date of this Directors’ Report. Interim dividend for the period ended 30 July 2011 of 11.0 cents per fully paid ordinary share, fully franked, paid on 12 May 2011 In addition to the above dividends, since the end of the financial year, the Board of Directors has determined a final fully franked dividend of 11.5 cents per fully paid share, to be paid on 16 November 2011. Further information regarding dividends is set out in the Financial Report (at note 25). $m 66,870 64,111 11141_MYER_AR11_Financials_PPv1.indd 37 10/10/11 10:57 AM 38 My er Holdings Annual Report 2011 l i M i ted Directors’ Report continued 12. Options granted over unissued shares 13. Shares issued on the exercise of options The Myer Equity Incentive Plan (MEIP) operates for selected senior executives and has been in operation since December 2006. Under the MEIP, eligible executives have been granted options over unissued shares of the Company, subject to certain vesting conditions. No options were granted under the MEIP in the financial year ended 30 July 2011. The following table sets out the details of options that have been granted under the MEIP over unissued shares of the Company and that remain on issue as at the date of this Directors’ Report: Date options granted Expiry date Exercise price of options Number under option 1 December 2006 15 October 2011 1 August 2007 15 October 2011 23 January 2008 21 December 2012 17 December 2008 24 October 2013 30 June 2009 24 October 2014 6 November 2009 31 December 2013 6 November 2009 31 December 2013 6 November 2009 31 December 2012 $0.01 $1.27 $3.00 $2.14 $2.34 $4.10 $5.74 $4.10 35,204 98,394 7,168,580 3,549,863 3,870,900 2,941,177 2,227,723 5,152,671 Closing balance 25,044,512 The number of shares that option holders are entitled to receive on the exercise of an option, or the exercise price of those options, may be adjusted in a manner consistent with the ASX Listing Rules if: › there is a pro‑rata issue of shares to the Company’s shareholders (such as a bonus issue); or any reconstruction of the capital of the Company (such as a subdivision or return of capital). › From time to time the Company issues fully paid ordinary shares of the Company to the Myer Equity Plans Trust for the purposes of meeting anticipated exercises of securities granted under the MEIP. During the period ended 30 July 2011, 1,150,000 fully paid ordinary shares of the Company were issued to the Myer Equity Plans Trust for this purpose. To calculate the issue price of shares issued to the Trust, the Company uses the 7‑Day Volume Weighted Average Share Price of the Company’s shares as at the close of trading on the date of issue. The Myer Equity Plans Trust held 537,016 fully paid ordinary shares of the Company as at 1 August 2010. On exercise of securities granted under the MEIP, shares may be transferred from the Myer Equity Plans Trust to the relevant participants or the Company may issue fully paid ordinary shares directly to MEIP participants. During the period, 1,380,611 shares were transferred from the Myer Equity Plans Trust to participants on the exercise of options under the MEIP, as detailed below. Date options granted Exercise price of options Number of shares provided on exercise of options 1 December 2006 1 August 2007 23 January 2008 $0.01 $1.27 $3.00 480,000 208,278 692,333 1,380,611 In addition, the following fully paid ordinary shares of the Company were issued during the period ended 30 July 2011 on the exercise of options held by Mr Wavish, a former Director of the Company. Date options granted Exercise price of options Number of shares issued on exercise of options 1 December 2006 $0.01 480,000 If the manner of adjustment is not prescribed by the ASX Listing Rules, the Board can determine the adjustment to ensure that option holders are not advantaged or disadvantaged as a result of any such capital action. Grant of performance rights Following a review of the Company’s remuneration structure in 2011, the Board revised the Company’s long term incentive plan for selected senior executives. For the 2012 financial year, performance rights will be granted under the MEIP (instead of options). Further information about the proposed grant of performance rights under the MEIP is included in the Remuneration Report. Post balance date events Since 30 July 2011, 100,000 further shares have been issued to, or otherwise acquired by the Myer Equity Plans Trust. Since 30 July 2011, 325,607 fully paid ordinary shares of the Company held by the Myer Equity Plans Trust were transferred to participants on the exercise of options granted under the MEIP, as detailed in the table below. Date options granted Exercise price of options Number of shares provided on exercise of options 1 December 2006 1 August 2007 17 December 2008 $0.01 $1.27 $2.14 281,605 22,002 22,000 325,607 In addition, since 30 July 2011, the following fully paid ordinary shares of the Company were issued on the exercise of options held by Mr McDonald and Mr Flood. These options were granted during their previous roles as both consultants and Directors prior to the public listing of the Company. Date options granted 1 August 2007 Exercise price of options Number of shares issued on exercise of options $1.27 36,667 Refer to the Financial Report (at note 23) for further details. 11141_MYER_AR11_Financials_PPv1.indd 38 10/10/11 10:57 AM 39 14. Remuneration Report 18. Non‑audit services The Remuneration Report, which comprises part of this Directors’ Report, is presented separately on pages 40 to 53. 15. Indemnification and insurance of Directors and Officers The Company’s Constitution requires the Company to indemnify current and former Directors, Alternate Directors, Executive Officers and Officers of the Company on a full indemnity basis and to the full extent permitted by law against all liabilities incurred as an officer of the Group, except to the extent covered by insurance. Further, the Company’s Constitution permits the Company to maintain and pay insurance premiums for director and officer liability insurance, to the extent permitted by law. Consistent with (and in addition to) the provisions in the Company’s Constitution outlined above, the Company has also entered into deeds of access, indemnity and insurance with all Directors of the Company which provide indemnities against losses incurred in their role as Directors, subject to certain exclusions, including to the extent that such indemnity is prohibited by the Corporations Act 2001 or any other applicable law. The deeds stipulate that the Company will meet the full amount of any such liabilities, costs and expenses (including legal fees). During the financial year the Company paid insurance premiums for a Directors’ and Officers’ liability insurance contract that provides cover for the current and former Directors, Alternate Directors, Secretaries and Executive Officers of the Company and its subsidiaries. The Directors have not included details of the nature of the liabilities covered in this contract or the amount of the premium paid, as disclosure is prohibited under the terms of the contract. The Company may decide to employ its external auditor on assignments additional to its statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. Details of the amounts paid or payable to the auditor (PwC) for audit and non‑audit services provided during the year are set out in the Financial Report (at note 27). The Board of Directors has considered the position and, in accordance with advice received from the Audit, Finance and Risk Committee, is satisfied that the provision of the non‑audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non‑audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: › all non‑audit services have been reviewed by the Audit, Finance and Risk Committee to ensure they do not impact on the impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. › 19. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 112 of this Annual Report. 20. Rounding of amounts 16. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. The Group has taken advantage of Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. This Directors’ Report is made in accordance with a resolution of Directors. Howard McDonald Chairman Melbourne, 5 October 2011 No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. 17. Environmental regulation The Group is subject to and has complied with the reporting and compliance requirements of both the Energy Efficiency Opportunities Act 2006 and the National Greenhouse and Energy Reporting Act 2007. No environmental breaches have been notified to the Group by any government agency. The Energy Efficiency Opportunities Act 2006 requires the Group to assess its energy usage, including the identification, investigation and evaluation of energy saving opportunities, and to report publicly on the assessments undertaken, including action the Group intends to take as a result of such assessments. As required under this Act, the Group registered with the Department of Resources, Energy and Tourism as a participant entity and is due to submit its fourth public report for financial year 2011 by 31 December 2011. The Group has published its EEO public reports on the Investor Centre section of its website, www.myer.com.au/investor (under Reporting – Sustainability). The National Greenhouse and Energy Reporting Act 2007 (NGER Act) requires the Group to report its annual greenhouse gas emissions and energy use. The Group has implemented systems and processes for the collection and calculation of the data required, and is due to submit its third report to the Greenhouse and Energy Data Officer by 31 October 2011, in compliance with the requirements of the NGER Act. 11141_MYER_AR11_Financials_PPv1.indd 39 10/10/11 10:57 AM 40 My er Holdings Annual Report 2011 l i M i ted Remuneration Report This Remuneration Report sets out the remuneration information for Myer Holdings Limited’s Non‑Executive Directors, Executive Directors, other Key Management Personnel (KMP) and the five highest remunerated executives of the Group and the Company. Directors and executives disclosed in this report Name Position Non-Executive Directors › H McDonald Chairman, Independent Non‑Executive Director Role of the Nomination and Remuneration Committee The Board has established a Nomination and Remuneration Committee (Committee), which has the responsibility to make recommendations to the Board on: › Non‑Executive Director fees; › executive remuneration (directors and other executives) including specific recommendations on remuneration packages and other terms of employment for the CEO, other senior executives and Non‑Executive Directors, including the Chairman; and the over‑arching remuneration framework including the policy, strategy and practices for both short and long term incentive plans. A Brennan Independent Non‑Executive Director T Flood Independent Non‑Executive Director C Froggatt Independent Non‑Executive Director (appointed 9 Dec 2010) P Hay R Myer Independent Non‑Executive Director Independent Non‑Executive Director Executive Directors B Brookes Chief Executive Officer and Managing Director Other Key Management Personnel N Abboud Executive General Manager Stores M Ashby Chief Financial Officer G Travers Executive General Manager Business Services P Winn1 Executive General Manager Merchandise & Logistics Other persons who are among the 5 highest paid remunerated group and/or company executives N Merola2 Business Manager Corporate Services J Hawker3 Group General Manager Business Development & Concessions Changes since the end of the reporting period: 1 P Winn resigned from the Group and will leave on 8 December 2011. 2 N Merola – Business Manager Corporate Services was the 5th highest remunerated executive for financial year 2011. N Merola ceased employment with the Group on 31 July 2011. 3 J Hawker – Group General Manager Business Development & Concessions was the 5th highest remunerated executive for financial year 2010 but not the current year. J Hawker ceased employment with the Group on 31 July 2011. Summary of report This report provides details on the following matters: Role of the Nomination and Remuneration Committee › › Linking Remuneration and Company Performance › New Contract of Employment – Mr Bernie Brookes › The Remuneration of Executives and Non Executive Directors, KMP and other Company Executives › Details of Remuneration: Bonuses and Share Based Compensation Benefits › ASX Corporate Governance Principles and Recommendations. The Committee has been established under rule 8.15 of the Constitution of the Company. The objective is to ensure that remuneration policies and structures are fair and competitive and aligned with the long term strategic interests of the Group and the creation of shareholder value. In doing this, the Nomination and Remuneration Committee seeks advice from independent remuneration consultants. Further information on the role of the Committee, its membership and meetings held throughout the year are set out in the Corporate Governance Statement and the Directors’ Report. Responsibility for remuneration policy In discharging its responsibilities, the Committee must have regard to the following policy objectives: › to ensure that the Company’s remuneration structures are equitable and aligned with the long term interests of the Company and its shareholders; to attract and retain skilled executives; to structure short and long term incentives that are challenging and linked to the creation of sustainable shareholder returns; and to ensure that any termination benefits are justified and appropriate. › › › The Committee must at all times have regard to, and notify the Board as appropriate of, all legal and regulatory requirements, including any shareholder approvals required in connection with remuneration matters. The Committee Chair or if they are not available, a Committee member will, attend the Annual General Meeting and make themselves available to answer any questions from shareholders about the Committee’s activities or, if appropriate, the Company’s remuneration arrangements. Principles used to determine the nature and amount of remuneration Executive Remuneration Policy Since the listing of the Company in November 2009, the Board has taken independent advice with regard to the Group’s remuneration structure and market comparators for the executive group. After consultation with external remuneration consultants Mercer (Australia) Pty Ltd, the Board has introduced an executive remuneration framework that is market competitive and complementary to the Company’s overall reward and recognition strategy. As a general guide, the Company targets a median fixed remuneration position as compared to our comparator group and a higher position towards the 75th percentile for incentive reward against the same group. The remuneration structure seeks to ensure that executive rewards deliver an appropriate balance between shareholders’ and executives’ interests. The remuneration structure provides a mix of fixed and variable (or ‘at risk’) pay, and a blend of short and long term incentives. As executives gain seniority within the Group, the balance of this mix shifts to a higher proportion of ’at risk’ incentives. In order to align shareholders’ and executives’ interests and attract and retain talent, the remuneration structure is designed to: › encourage a performance‑based workplace culture and recognition for contribution to meeting business objectives; have profit as a core component of reward design; › 11141_MYER_AR11_Financials_PPv1.indd 40 10/10/11 10:57 AM 41 Non‑Executive Directors’ fees are determined within an aggregate Directors’ fee pool limit as approved from time to time by Myer shareholders in general meeting. The maximum aggregate sum excludes special and additional remuneration for special exertions and additional services performed by a Director as determined appropriate by the Board but includes superannuation as is required by the ASX Listing Rules as well as committee fees as indicated below. The Constitution also makes provision for Myer to pay all expenses incurred by Directors in attending meetings and carrying out their duties. The current maximum aggregate fee pool limit is $2,150,000 per annum. The current base fees for Non‑Executive Directors were last reviewed in September 2011 and no changes were proposed to either Board or committee chair fees. The aggregate fee pool limit has not changed since the Group was listed. Non‑Executive Directors who chair a committee also receive additional yearly fees for their role in serving that committee. The following fees currently apply: Base annual fees Chair Other Non‑Executive Directors Additional annual fees Audit Finance and Risk Committee – Chair Audit Finance and Risk Committee – member Nomination and Remuneration Committee – Chair Nomination and Remuneration Committee – member $500,000 $150,000 $30,000 – $15,000 – Non‑Executive Directors do not receive performance‑based pay. However, they are able to purchase shares in the Company, which can be acquired on market during approved ‘windows’ for share trading consistent with the Company’s Guidelines for Dealing in Securities. During the year, Mr McDonald and Mr Flood held unvested options they received when engaged by the Company as consultants and Directors prior to the listing of the Company in 2009. These options vested on 31 July 2011 and have since been exercised. Mr McDonald and Mr Flood do not hold any other options and are not eligible to participate in the Company’s current employee equity plans. Retirement allowances for Non-Executive Directors Non‑Executive Directors are not entitled to any additional remuneration upon retirement. Superannuation contributions required by legislation are made from the fee paid to Directors and fall within the aggregate fee pool limit. › › › › through long term incentive, focus on sustained growth in shareholder returns, consisting of dividends and growth in earnings per share and share price; delivering consistent returns as well as focusing the executives on key non‑financial drivers of value; attract and retain high‑calibre executives; and, reward capability and performance. Nomination of Directors With respect to nominations of Directors, the responsibilities of the Committee are as follows: › review and recommend to the Board the size and composition of the Board, including review of Board succession plans and the succession of the Chairman and CEO; review and recommend to the Board the criteria for Board membership, including assessment of necessary and desirable competencies of Board members; assist the Board as required to identify individuals who are qualified to become Board members (including in respect of any Executive Directors), in accordance with the following factors: – the skills, experience, expertise and personal qualities that will best complement Board effectiveness; and the capability of the candidate to devote the necessary time and commitment to the role. This involves a consideration of matters such as other Board or executive appointments, potential conflicts of interest, and independence; – review and recommend to the Board membership of the Board, including recommendations for the appointment and re‑election of Directors, and where necessary propose candidates for consideration by the Board, subject to the principle that a Committee member must not be involved in making recommendations to the Board in respect of themselves; assist the Board as required in relation to the performance evaluation of the Board, its committees and individual Directors, and in developing and implementing plans for identifying, assessing and enhancing Director competencies; review and make recommendations in relation to any corporate governance issues as requested by the Board from time to time; review the Board Charter on a periodic basis, and recommend any amendments for Board consideration; review the time expected to be devoted by Non‑Executive Directors in relation to the Company’s affairs; and ensure that an effective induction process is in place for any newly appointed Directors and regularly review its effectiveness. › › › › › › › › Non-Executive Directors’ Remuneration Policy With respect to remuneration practices for Non‑Executive Directors, the responsibilities of the Committee are set out in the Nomination and Remuneration Committee Charter, a copy of which is on the Group website. Members of the Committee The current members of the Nomination and Remuneration Committee are: › C Froggatt (Chair) R Myer › › A Brennan › H McDonald Fees for Non-Executive Directors Fees and payments to Non‑Executive Directors reflect the demands which are made on, and the responsibilities of, those Directors. The Board, on recommendation of the Nomination and Remuneration Committee reviews Non‑Executive Directors’ fees and payments at least once a year. As part of that review the Board considers the advice of independent remuneration consultants in relation to both the Chairman’s fees and payments and separately the Non‑Executive Directors’ fees and payments. Linking remuneration and Company performance The Company’s remuneration principles and polices have been applied during the year to ensure remuneration outcomes for executives reflect the prevailing market conditions and Company performance. Adjustments to the fixed component of executives’ remuneration have been modest reflecting individual performance and market competitiveness for similar roles at peer organisations. The Company uses both Short and Long Term incentives to link individual performance to the performance of the Company. Given the Company’s profit result for the year, no short term incentive has been paid to senior managers, including the KMP group. The Company is required to reflect the value of long term incentive rewards to KMP reported each year, in accordance with the relevant accounting standard. In complying with this standard, the value of the long term incentive amount reflecting share based reward has been adjusted downward, based on the expectation of the number of options considered likely to ultimately vest. As a consequence the value of the long term incentive to senior executives as reflected in the table on page 45 was also less than the previous year. 11141_MYER_AR11_Financials_PPv1.indd 41 10/10/11 10:57 AM 42 My er Holdings Annual Report 2011 l i M i ted Remuneration Report continued The following table shows the Company’s annual performance since listing in November 2009. The table shows the impact of Company performance on shareholder returns, taking into account dividend payments, share price changes, and other capital adjustments during the period. Given the prevailing economic conditions and their impact on the retail sector generally, the Board has been satisfied with the performance of the Myer management team in relation to each of these areas of focus. While the returns generated from the business were solid for the year, the Board has determined that they do not warrant the payment of the MAIP for the year. Basic earnings per share (cents/share)1 31 July 2010 29.0 30 July 2011 27.9 Net profit after tax (millions)2 $168.70 $162.70 Dividends cents per share Share price at beginning of year3 Share price at end of year 22.0 $4.10 $3.45 22.5 $3.45 $2.31 1 2 3 2010 Basic earnings per share is calculated using proforma Net profit after tax and divided by the closing shares on issue. 2011 Basic earnings per share is calculated using normalised Net profit after tax and divided by the weighted average shares. For details of 2010 and 2011 Net profit after tax refer to page 11. 2010 share price at the beginning of the year is the share price at listing. Executives’ pay The executive pay and reward framework has three components: › › base pay and benefits, including superannuation; short term incentives (STI) through participation in the Myer Annual Incentive Plan (MAIP); and long term incentives (LTI) through participation in the Myer Equity Incentive Plan (MEIP). › The combination of these three components comprises an executive’s total remuneration. A further long term incentive in the form of retention incentive was introduced for selected executives at the time of the listing of Myer. These incentives were targeted at retaining those executives for an extended period after the listing and expire on 1 November 2011. The Board has completed a review of executive pay (including base pay as well as the structure and application of short and long term incentive plans) and considers this combination best meets the objectives established by the Board for executive pay and reward. Executive reward across base pay, short and long term incentives has regard to the performance of the Company on a range of objectives including generating sustained growth and shareholder returns. In considering the quantum of executive remuneration, the Board has had regard to: › the profit generated and sales achieved in the prevailing trading environment; the dividend paid by the Company; the continuation of good cost control; and the continued progress of the business reflected in the re‑launching of our flagship Myer Melbourne store, opening two new stores in Top Ryde and Robina, the development of the new Mackay and Townsville stores and the establishment of the Global Sourcing Offices in Shanghai and Hong Kong. › › › Cash payments and benefits These are structured as a base payment, which may be delivered as a combination of cash, superannuation and other approved salary packaged benefits. Executives are offered a competitive base pay that comprises a fixed component of pay and benefits. In determining the base pay for executives, including the CEO, the Board has regard to the market rate for a comparable role in a peer level organisation as well as the experience, skill and proven performance of the executive. Base pay for executives is also reviewed annually having regard to performance against set objectives. An executive’s pay is also reviewed on promotion. Superannuation Myer makes superannuation contributions on behalf of employees consistent with its obligations under relevant legislation. Short Term Incentives Myer’s short term incentive plan (MAIP) operates on an annual basis subject to Board review and approval. The MAIP applies to all eligible management team members including the KMP, subject to certain conditions and performance criteria being met which are reviewed and approved annually by the Board. The performance criteria for the year are outlined below. While the performance criteria may vary (in part) on an annual basis, they are primarily focused on the achievement of operating plans and budgets with a significant weighting to profit and sales objectives. The current quantum of an executive’s MAIP reward varies depending on the specific role, with a potential reward of 100% of base pay at the CEO level for ’at target’ performance, 75% for KMP, through to a set $1,000 reward for ’at target’ performance for entry level management roles. If the Group achieves the pre‑determined performance targets set by the Board, a short term incentive will be paid. MAIP rewards are generally payable in September each year after the final determination and release of audited full‑year results. The MAIP currently uses a profit target as a threshold to ensure that an STI reward is only available when profit is consistent with or in excess of the business plan approved by the Board. Each executive has a target MAIP reward depending on their accountabilities and their impact on the Group or business unit performance. The target reward is the maximum total STI payment for achieving target objectives. A minimum threshold is also set, below which no STI reward is provided. The Board retains the discretion to provide an award greater than the target maximum reward where performance against the performance criteria warrants such a reward. Each year, the Committee considers the appropriate performance criteria and recommends any payout level under the MAIP, if targets are met, for Board approval. 11141_MYER_AR11_Financials_PPv1.indd 42 10/10/11 10:57 AM For the period ended 30 July 2011, the key performance indicators that were used to determine if any reward was to be provided under the MAIP, were drawn from the following measures, which were the key focus areas for the Group in FY11. The Board reviews these metrics on an annual basis: Financial Measures, including EBITDA, Store Controllable Profit, › Merchandise Business Controllable Profit – all key drivers of financial returns enabling shareholder returns; › Company Sales, Store/Regional Sales and Merchandise Business Sales – our sales results combined with other business initiatives feed into the financial results; › Customer Service Measures – as measured by an external third party company focusing on 7 aspects of Customer Service delivered in the Stores – service being a key element of our merchandise offer to customers; and Stockturn Measures – at Company and Business unit levels reflecting the performance of our integrated logistics and merchandise arrangements. › Executives were assessed against a combination of Group and/or Area performance measures based on various scorecards that reflect ‘financial’, ‘key operational’ and ‘service’ measures appropriate to the executive’s role. Consistent with the categories of key performance indicators outlined above, for the CEO and other KMPs, the provision of MAIP rewards was weighted against four Company measures: 1. Company Sales (40% of target); 2. EBITDA (50% of target); 3. Overall Customer Service Score (5% of Target); and 4. Company Stockturn performance (5% of Target). In light of these measures, the Board determined that no MAIP payments would be provided for the 2011 financial year, as a result of the FY11 EBITDA, while higher than in the previous year, failing to achieve the required minimum threshold. The EBITDA objective is the threshold requirement, regardless of performance against any other measure and must be met before any other reward can occur. Overall rewards for the KMP group and certain other executives are set out on page 45 of this report. The Committee is responsible for assessing whether the performance criteria are met. To help make this assessment, the Committee receives reports on performance from management. All proposed MAIP payments are verified by internal audit review prior to any payment being made. The Committee has the discretion to recommend to the Board an adjustment to short term incentives in light of unexpected or unintended circumstances. As the EBITDA objective set for 2011 was not achieved, no MAIP was paid for the year regardless of performance against the other key performance indicators. The following graph shows the average individual total MAIP payment (as a % of each individual’s target MAIP, where 100% is the target) for the KMP group and its relationship to group EBITDA over the two years from the listing of the Company. 340 339 338 337 336 335 334 333 332 100 90 80 70 60 50 40 30 20 10 0 340 339 338 337 336 335 334 333 332 m $ A D T B E I 2010 2011 EBITDA Average STI Payout % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 I T S t e g r a t f o e g a t n e c r e P s e v i t u c e x e r o n e s o t d a p i i 43 Long Term Incentives Myer Equity Incentive Plan Myer’s long term incentive plan (Myer Equity Incentive Plan – MEIP) operates for selected senior executives and has been in operation since December 2006. Under the MEIP, eligible senior executives have in the past been granted options each entitling them to acquire one fully paid ordinary share in the Company, subject to the satisfaction of vesting terms and conditions determined by the Board. In 2011, the Board reviewed the long term incentives provided to the senior executives as part of its annual review of the remuneration structure. As part of that review, the Board introduced a new long term incentive plan involving the grant of ‘performance rights’ under the MEIP. No long term incentive was awarded during the 2011 financial year, however the new plan will form the basis of the revised long term incentive program. A performance right is similar to an option in that it provides the executive with a right to acquire a share in the Company if certain performance conditions are satisfied. However, unlike an option, an executive does not need to pay any exercise price to exercise a performance right, meaning fewer performance rights need to be granted which reduces dilution of shareholders’ interests. The performance conditions are designed to create and deliver sustained shareholder returns and to reward executives when shareholders benefit. The key terms of the new plan are described on page 49 to 50. The first grant under this new plan will occur in October 2011. As announced on 10 August 2011, the CEO will participate in the new long term incentive plan subject to approval of the grant of performance rights to him by shareholders at the November 2011 Annual General Meeting. Retention arrangements In November 2009, the Board approved retention incentives for a select number of executives other than the CEO to ensure, to the extent possible, that the executive team in place prior to the listing of Myer in 2009 remained in place and continued to deliver on the business objectives established by the Board. The retention arrangements are in the form of deferred cash incentives and are conditional on continued employment with the Group and meeting certain performance conditions as established by the Company. The retention arrangements involve payments over a staggered period and the first payment was made on the first anniversary of the listing of Myer. This payment represented approximately one third the total amount of the retention incentive. Payment of the balance of the retention incentive is due on 1 November 2011 to further encourage retention and stability within the executive team. Generally, the amount paid to an individual over the 2 year retention period represents approximately one year of base pay as at the date the retention incentives were granted. Of the 45 executives who were eligible for retention incentives, 89% remained with the Company as at 30 July 2011. Service agreements On appointment to the Board, all Non‑Executive Directors sign a letter of appointment. The letter summarises the Board policies and terms relevant to the office of Director (including remuneration). Remuneration and other terms of employment for the CEO and the other executive KMPs are also formalised in service agreements. Each of these agreements prescribes a base or fixed remuneration amount, a short term incentive reward under the MAIP, other benefits including salary sacrificing for vehicle leasing and, when eligible, long term incentive reward through participation in the MEIP. Other key provisions of the agreements relating to remuneration are summarised below. For certain senior executives including all KMP other than the CEO, the retention incentives discussed above have been incorporated into their employment agreements. 11141_MYER_AR11_Financials_PPv1.indd 43 10/10/11 10:57 AM 44 My er Holdings Annual Report 2011 l i M i ted Remuneration Report continued The termination provisions for the executive KMP are described below: Name Contract type B Brookes Fixed term – ending on 31 Aug 2014 N Abboud Rolling Contract M Ashby G Travers P Winn Rolling Contract Rolling Contract Rolling Contract Base salaries (TFC) quoted as at 30 July 2011. Base salary including superannuation 1 Termination notice period initiated by KMP Termination notice period initiated by Company Termination payment where initiated by the Company $1,709,400 $470,000 $530,000 $570,000 $570,000 6 months 3 months 3 months 3 months 3 months 12 months 12 months 2 6 months 6 months 6 months 6 months 6 months 6 months 6 months 6 months B Brookes’ revised contract provides that, subject to certain performance conditions being satisfied, if the contract runs through to term (31 August 2014) a cessation payment of 12 months average base TFC over the last 3 years may be made. B Brookes LTI offer contained in his new contract of employment provides for entitlements on termination in certain circumstances. These provisions are subject to shareholder approval at the November 2011 Annual General Meeting (see a detailed explanation of the contract terms below). 1 2 Mr Bernie Brookes – New Contract of Employment On 10 August 2011, the Board and Mr Brookes agreed to new terms for an extension of Mr Brookes’ employment contract to 31 August 2014. The contract terms included the following changes from his previous contract terms: › Total Fixed Compensation has been adjusted by 5.3% to $1.8 million (inclusive of superannuation) Short Term Incentive at target remains at 100% of TFC, with the Board’s discretion to reward for any above target performance › › An entitlement to performance rights valued at $2,700,000, subject to shareholder approval to be provided under the MEIP. The rights will vest subject to meeting total shareholder return and earnings per share hurdles described on page 50 along with Mr Brookes establishing and delivering a succession and transition plan for the role of CEO and complying with his contract. Termination Conditions – – › – – – – Myer can terminate Mr Brookes’ employment with 12 months written notice or payment in lieu of notice (or a combination of these). Mr Brookes may terminate on 6 months written notice. If Mr Brookes’ employment ceases in August 2014 as a result of the fixed term of the new contract ending, he will be entitled to a payment equal to the 12 months average TFC paid to him over the preceding 3 years. In certain circumstances pursuant to his contract, Mr Brookes may be entitled to retain a pro‑rata number of his performance rights if his employment is terminated early by the Board with notice. The pro‑ rata number retained would take into account his period of service during the three year performance period for the performance rights. If the pro‑rata rights vest, the rights, other than for limited access to meet any tax liability arising from the vesting of the rights with Board approval may not be exercised till the expiry of the original performance period of three years. Mr Brookes will not be entitled to any payments upon termination where that payment would lead to a contravention of the Corporations Act or the ASX Listing Rules. Details of remuneration Amounts of remuneration Details of the remuneration of the Directors and the Key Management Personnel (as defined in AASB 124 Related Party Disclosures) of the Company are set out in the following tables. The Key Management Personnel of the Company include each of the Directors and each of the following executives, who report directly to the CEO: › N Abboud – Executive General Manager Stores › M Ashby – Chief Financial Officer › G Travers – Executive General Manager Business Services › P Winn – Executive General Manager Merchandise & Logistics In addition, details for the following executives are also disclosed in accordance with the Corporations Act 2001 as they are among the five highest remunerated Group and/or Company executives in 2010 or 2011. › N Merola – Business Manager Corporate Services relevant for › financial year 2011 J Hawker – Group General Manager Business Development & Concessions ceased employment with the Group on 31 July 2011 and is relevant for financial year 2010. The Remuneration of Executive and Non‑executive Directors, KMPs and other Company executives The following tables have been prepared in accordance with Section 300A of the Corporations Act 2001 (Cth). They show details of the nature and amount of each element of the remuneration paid or awarded for services provided in this period. In the case of share based payments and retention incentives, the amounts disclosed reflect the amount expensed during the year in accordance with relevant accounting standards and accordingly this does not necessarily reflect the amount actually paid to the individual during the year, which may be more or less than the amount shown in the table. The following table shows the remuneration amounts recorded in the financial statements in the period. 11141_MYER_AR11_Financials_PPv1.indd 44 10/10/11 10:57 AM 45 Short term benefits Post employment benefits Long term benefits Cash salary & fees 1 $ Bonus/ incentive STI 2 $ Non- monetary benefits $ Super- annuation 4 $ Long service leave $ Other 3 $ Incentives 5 $ Name Total remuner- ation expenses excluding Share- based payments $ Termin- ation and other payments $ Share- based payments 6 $ Total remuner- ation expenses 7 $ – 61,338 93,176 – 136,500 138,973 136,500 67,113 145,056 149,243 484,753 486,565 164,801 116,108 Non-Executive Directors H McDonald 2011 2010 A Brennan 2011 2010 T Flood 2011 2010 C Froggatt11 2011 2010 P Hay 2011 2010 R Myer 2011 2010 G Kusin11 2011 2010 Executive Directors B Brookes 2011 2010 W Wavish8 2011 2010 Key Management Personnel N Abboud 2011 2010 M Ashby 2011 2010 G Travers 2011 2010 P Winn 2011 2010 Other Company Executives N Merola9 2011 2010 J Hawker10 2011 2010 Totals 2011 Totals 2010 – 407,857 5,031,443 4,909,996 1,629,652 1,600,362 466,273 434,507 544,753 525,070 536,553 486,866 248,673 – 444,753 409,386 – 26,608 – – – – – – – – – – – – – – – 1,900,000 – – – – – – – – – – – – – 835,177 133,357 376,256 – – – 1,165 – 165,810 33,567 (31,074) – 195,097 – 218,415 – 210,252 1,856 2,292 1,856 2,292 1,856 2,292 – – 8,559 – – 185,382 – 1,810,133 – 2,292 181,051 2,255,515 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 15,247 14,763 15,199 41,392 13,500 13,745 9,215 – 13,500 6,638 14,346 14,725 – – – – – – – – – – – – – – – – 50,048 50,906 47,772 17,863 – 3,982 – (26,709) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 500,000 2,401,328 3,187 35,453 503,187 2,436,781 180,000 157,500 150,000 152,718 102,391 – 150,000 73,751 159,402 163,968 – 61,338 – – 180,000 157,500 1,195 13,295 151,195 166,013 – – – – – – – – 102,391 – 150,000 73,751 159,402 163,968 – 61,338 – 1,860,829 2,880,564 (947,404) 2,568,922 – 913,425 5,449,486 – 3,212,616 – 3,217,662 – 245,286 – 3,462,948 15,247 24,636 48,727 47,739 15,247 14,785 23,447 32,880 11,412 13,032 207,500 251,250 8,401 2,784 207,500 251,250 15,806 6,121 207,500 251,250 8,510 3,271 207,500 251,250 – – – – – – – – 712,479 833,040 (85,233) 194,750 627,246 1,027,790 732,757 933,669 (74,290) 248,571 658,467 1,182,240 785,162 1,017,933 (133,824) 166,343 651,338 1,184,276 777,866 986,811 (68,960) 228,834 708,906 1,215,645 25,786 – 4,261 – 66,250 – 258,500 – 612,029 – 3,614 – 615,643 – – 50,295 259,509 316,486 – 6,421 96,162 22,783 – – 896,250 1,005,000 – – 258,500 3,212,616 – 652,247 6,722,915 13,532,529 – 29,979 (1,301,715) 3,731,433 – 682,226 5,421,200 17,263,962 11141_MYER_AR11_Financials_PPv1.indd 45 10/10/11 10:57 AM 46 M y e r H o l d i n g s liMi t e d Annual Report 2011 Remuneration Report continued 1 2 Cash salary for KMPs and other Company executives includes fixed remuneration, short term compensated absences, consideration for vehicle salary sacrifice and in the case of Non–Executive Directors, fees including allowances for committee ‘chair’ responsibilities for A Brennan, C Froggatt and R Myer. Short Term Incentive (STI) payments are made under the Myer Annual Incentive Plan (MAIP) and relate to program performance and conditions for the year they were earned, not the subsequent year in which the payment is made. Based on the performance criteria established by the Board in relation to MAIP, no short term incentive payments have been earned in relation to financial year 2011. 3 Other payments were made to B Brookes of $133,357 as provided for under his contract of employment for rental subsidy, certain services in relation to the provision of his accommodation and spousal travel. H McDonald did not receive any other payment in 2011 and payments made to him in 2010 related to payments made at the time of the listing of Myer. Other payments in 2011 to N Abboud, M Ashby, G Travers, P Winn, N Merola and J Hawker reflect FBT paid in respect of car park benefits, relevant spousal travel for business related travel undertaken at the request of the Company and where relevant, payments made by the Company to assist victims of recent natural disasters. 4 Other than for W Wavish (refer footnote 8 below) there were no post employment benefits paid other than superannuation in relation to 2010 or 2011. 5 6 7 Retention incentives were provided to KMP (other than the CEO) and certain selected other Company executives, subject to certain conditions being satisfied as part of revised employment contracts entered into in November 2009. The amount disclosed in both 2010 and 2011 represent the amount expensed in each year in accordance with the relevant accounting standard relating to such payments. The amounts disclosed do not represent the amounts actually paid to the individual in the years reported. N Abboud, M Ashby, G Travers and P Winn each received $170,000 cash payment on 1 November 2010. Should these KMP continue to meet the requirements of the retention incentive, they will each receive a further payment on 1 November 2011 of $330,000. This is the final payment under the retention incentive. Share based payments are grants of options under the MEIP. They are valued based on the amount expensed for the period under the relevant accounting standard. There were no other equity settled share based payments and there were no cash settled share based payments during the year. No grants of shares or units were made during the financial year. In relation to H McDonald and T Flood, amounts disclosed under share based payments reflect the accounting expense of options issued in 2009 and do not represent any remuneration provided to them in the current year. Total Remuneration Expense represents the total amount expensed by the Company across all aspects of reward for Non‑Executive Directors and other executives in accordance with the relevant accounting standard. The amount does not reflect the amount actually paid to the individual during the year. 8 W Wavish was previously Executive Chairman of Myer. He ceased employment with Myer at 4 August 2009. He was paid a cash salary between 25 July 2009 and 4 August 2009. As part of the terms agreed on his separation, he was paid amounts including: payment in lieu of notice, payment for termination and in relation to the provision of consultancy services to Myer, and in relation to other obligations under the settlement and release agreement. The amounts disclosed cover a 24 month period from 4 August 2009 to 31 July 2011. The consultancy period concluded on 31 July 2010. The terms of his settlement and release agreement continued to operate until 31 July 2011. 9 Denotes one of the five highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001. N Merola was one of the top 5 remunerated executives in financial year ended 30 July 2011. N Merola ceased employment with the Group on 31 July 2011 when his role was made redundant. N Merola’s total remuneration expense includes payments in relation to his redundancy and the payment of entitlements such as annual leave and long service leave. 10 Denotes one of the five highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001. J Hawker was one of the top 5 executives remunerated in financial year 2010 but was not in the current year. J Hawker ceased employment with Myer on 31 July 2011. 11 C Froggatt was appointed a Director of Myer on 9 December 2010. Payments are for the part year from her appointment. G Kusin resigned as a Director on 27 September 2009. He received no payments in the current year. STI and LTI remuneration The table below sets out the relative proportion of remuneration for the Executive Directors and other KMP as well as other executives that is linked to performance and the proportion which is fixed. Total remuneration expense1 Total fixed remuneration At risk — STI Share options Retention incentives At risk — LTI2 Name $ $ % $ % $ % 913,425 5,449,486 – 3,462,948 658,467 1,182,240 627,246 1,027,790 Executive Directors B Brookes3 2011 2010 W Wavish4 2011 2010 Key Management Personnel N Abboud 2011 2010 M Ashby 2011 2010 G Travers 2011 2010 P Winn 708,906 2011 2010 1,215,645 Other Company Executives N Merola5 2011 2010 J Hawker6 2011 2010 Totals 2011 Totals 2010 – 682,226 4,175,025 14,204,611 651,338 1,184,276 615,643 – 1,860,829 1,798,387 204% 35% – 835,177 – 5,046 504,979 415,980 525,257 487,322 577,662 548,268 570,366 525,309 287,279 – – 466,865 4,326,372 4,247,177 – 2% 81% 41% 80% 41% 89% 46% 81% 43% – – – 165,810 – 195,097 – 218,415 – 210,252 80% – – 68% 111% 40% – – – 185,382 – 1,810,133 0% 16% – 0% 0% 16% 0% 17% 0% 18% 0% 17% 0% – – 27% 0% 17% (947,404) 2,568,922 – 245,286 (85,233) 194,750 (74,290) 248,571 (133,824) 166,343 (68,960) 228,834 3,614 – – 29,979 (1,306,097) 3,682,685 (104%) 49% – 98% (14%) 19% (11%) 21% (21%) 14% (10%) 19% 1% – – 5% (33%) 34% $ – – – – 207,500 251,250 207,500 251,250 207,500 251,250 207,500 251,250 66,250 – – – 896,250 1,005,000 % 0% 0% – 0% 33% 24% 31% 21% 32% 22% 29% 21% 19% – – 0% 22% 9% 11141_MYER_AR11_Financials_PPv1.indd 46 10/10/11 10:57 AM 47 1 2 3 4 Total remuneration expense represents the total amount expensed by the Company across all aspects of reward for Non‑Executive Directors and other executives in accordance with the relevant accounting standard. The amount does not reflect the amount actually paid to the individual during the year. At Risk LTI was provided through the provision of retention incentives for selected executives and the grant of options to individual executives under the MEIP however no grants were made in the current year. The options reflected in this table were granted in previous years and have been independently valued as at the date the option was granted to the executive. The proportions shown represent the amount expensed for the period under the relevant accounting standard as a proportion of total remuneration expense for the period. The amount disclosed for N Abboud, M Ashby, G Travers, and P Winn also includes the current expense in relation to retention incentives. As described on page 43, a new LTI plan involving the grant of performance rights under the MEIP has been introduced for the 2012 financial year. The reduction in B Brookes total remuneration expense for 2011 reflects the reduction in the value of the amount expensed for share based payments in accordance with the relevant accounting standard. Payments made to B Brookes reported in 2010 exclude his discretionary bonus payment of $247,000 made during that year. These payments are included in the total remuneration expense, but do not form part of his total fixed remuneration, STI or LTI. The relative percentage proportions of remuneration for the reporting period 2010 for W Wavish excluded his termination and other payments. This payment was included in his total remuneration expense, but did not form part of this total fixed remuneration, STI or LTI. W Wavish ceased employment with Myer at 4 August 2009 and accordingly is not included in this reporting year. 5 N Merola is included in the table as one of the five highest remunerated executives for the reporting period for total remuneration expense. Payments made on termination are included in his total remuneration expense, but do not form part of this total fixed remuneration, STI or LTI. 6 J Hawker is included in the table as one of the five highest remunerated executives in the previous reporting year, but not this reporting year. Long Term Incentives – Historical options granted under the MEIP As noted on page 43, the Company’s LTI plan previously involved the grant of options under the MEIP. Under the terms of those options, senior executives can only exercise their options once the vesting conditions are satisfied. Executives who then wish to exercise any of their vested options must pay the relevant exercise price after which shares in the Company are provided to them. Option holders do not have the right to participate in any securities issues made by the Company although, consistent with the ASX Listing Rules, there is provision for adjustments in the event of certain capital actions made by the Company. Since 2006, six offers of options have been made to selected executives under the MEIP. Details of options granted under the MEIP that remain unvested as at 30 July 2011 are set out in the table below. Number of unvested options Exercise price Value per option at grant date Vesting date (if option holder remains employed by a Group company) Expiry date 316,809 90,338 2,660,971 2,660,971 514,600 514,600 2,676,663 234,800 234,800 3,684,300 5,152,671 2,227,723 3,193,278 24,162,524 $0.01 $1.27 $3.00 $3.00 $2.14 $2.14 $2.14 $2.34 $2.34 $2.34 $4.10 $5.74 $4.10 $0.21 $0.50 $0.37 $0.37 $0.43 $0.43 $0.43 $0.49 $0.49 $0.49 $1.31 $1.01 $1.19 31 Jul 2011 15 Oct 2011 31 Jul 2011 15 Oct 2011 31 Jul 2011 21 Dec 2012 31 Jul 2012 21 Dec 2012 31 Jul 2011 24 Oct 2013 31 Jul 2012 24 Oct 2013 31 Jul 2013 24 Oct 2013 31 Jul 2012 24 Oct 2014 31 Jul 2013 24 Oct 2014 31 Jul 2014 24 Oct 2014 End of Perf. Periods 31 Dec 2013 End of Perf. Periods 31 Dec 2013 End of Perf. Period 31 Dec 2012 Financial year of offer 2007 2008 2008 2008 2009 2009 2009 2009 2009 2009 Grant date 1 Dec 2006 1 Aug 2007 23 Jan 2008 23 Jan 2008 17 Dec 2008 17 Dec 2008 17 Dec 2008 30 Jun 2009 30 Jun 2009 30 Jun 2009 2010 (CEO only) 6 Nov 2009 2010 (CEO only) 6 Nov 2009 2010 (Snr Execs) 6 Nov 2009 Total Refer to Financial Report page 106 for 2007, 2008, 2009 plans. 2011 grants No grants were made in financial year 2011. 11141_MYER_AR11_Financials_PPv1.indd 47 10/10/11 10:57 AM 48 My er Holdings Annual Report 2011 l i M i ted Remuneration Report continued 2010 grants Tranche A to D (CEO only) › In November 2009, the Board approved an additional grant of options under the MEIP to Mr Brookes to the value of $9,000,000 (valued as at the grant date of 6 November 2009). The options were granted in four tranches, at no cost to Mr Brookes, and formed the long term incentive component of Mr Brookes’ remuneration under his then new long term incentive arrangements. The independent valuation of each tranche of these options at the time of grant and the resulting number of options granted is shown in the following table. In total Mr Brookes was granted 7,380,394 options under these LTI arrangements. Three‑quarters of the options are subject to a performance hurdle based on Myer’s fully diluted earnings per share (EPS) (EPS Options) and one quarter of the options are subject to a performance hurdle based on Myer’s share price (Share Price Options). Vesting of the options is also subject to a service condition – vesting will be subject to Mr Brookes remaining employed by the Group until the end of the relevant performance period. Each option is an entitlement to one share upon payment of the exercise price. For the EPS Options, the exercise price is $4.10 per option and for the Share Price Options, the exercise price $5.74 per option. Options which do not satisfy the vesting conditions will lapse on the expiry date. The Board considered that a combination of EPS and share price performance were the most appropriate hurdles for these options. In particular, the EPS hurdle measures compound annual growth in EPS and was chosen based on a review of then market practice and the then lack of a valid peer group against which to measure the Group’s performance on other hurdles such as Total Shareholder Return (TSR). Share price growth was selected to encourage Mr Brookes to focus on delivering results that lead to an improvement in the share price of Myer above the IPO price. › › Performance hurdles for 2010 grants – Tranche A – D (CEO only) Set out below is a summary of performance hurdles and performance periods applicable to each component of the CEO grant. Financial year of grant Value of options at grant date Valuation of each option at grant date Number of options granted Exercise price Applicable hurdles Potential time of vesting 2010 Tranche A $5,400,000 $1.31 4,122,137 $4.10 EPS Hurdle1 End of First Performance Period. Re‑testing at end of Second Performance Period 2010 Tranche B $1,350,000 $1.31 1,030,534 $4.10 EPS Hurdle1 and extended 12 month service condition End of Second Performance Period 2010 Tranche C $1,800,000 $1.01 1,782,178 $5.74 Share Price Hurdle2 End of First Performance Period Re‑testing at end of Second Performance Period 2010 Tranche D $450,000 $1.01 445,545 $5.74 Share Price Hurdle3 and extended 12 month service condition End of Second Performance Period 1 2 For both 2010 Tranche A and B options, performance against the EPS hurdle will be measured at the end of the First Performance Period. If the EPS hurdle is not met at the end of the First Performance Period, the Tranche A and B options will be re‑tested at the end of the Second Performance Period, measuring the Company’s annual compound growth in EPS over the Second Performance Period applying the vesting schedule. For 2010 Tranche C options, performance against the Share Price Hurdle will be measured at the end of the First Performance Period. If the Share Price hurdle is not met at the end of the First Performance Period, the 2010 Tranche C options will be re‑tested at the end of the Second Performance Period. 3 For 2010 Tranche D options, performance against the Share Price hurdle will be measured at the end of the Second Performance Period. Performance periods for the CEO’s 2010 options are as follows: › › the First Performance Period is the three financial years ending July 2012; and the Second Performance Period is the four financial years ending July 2013. The vesting schedule and performance hurdles for the CEO’s 2010 EPS options are as follows: Compound annual growth rate in EPS over the performance period % of EPS options that will vest At 10% Between 10% and 12.5% At 12.5% Between 12.5% and 15% At or above 15% 33.33% Pro‑rata vesting between 33.33% and 66.66% 66.66% Pro‑rata vesting between 66.66% and 100% 100% The base EPS used for the purpose of determining the compound annual growth rate is 23.5 cents, representing FY09 fully diluted EPS, adjusted to a proforma basis consistent with the capital structure of the Group post IPO. The Share Price Options hurdle will be satisfied if the market price of the Company’s shares exceeds $5.74 at the end of the relevant performance period. For these purposes, the market price of the Company’s shares will be the volume weighted average price of the shares quoted on the ASX over one calendar month prior to the expiry of the relevant performance period. 11141_MYER_AR11_Financials_PPv1.indd 48 10/10/11 10:57 AM 49 Assessment At the end of each performance period the Committee reviews the Company’s audited financial results and the results of the other performance measures and assesses performance against each measure to determine the percentage of the options (if any) that will vest. 2010 Tranche E – Offered to Senior Executives (other than the CEO) in November 2009 In November 2009, the Board approved an additional grant of options under MEIP to selected individuals to the value of $4,100,000 (valued as at the grant date of 6 November 2009). These options were independently valued at $1.19 each as at the date of grant, resulting in a grant of 3,445,379 options in total. These options are subject to satisfaction of an EPS performance hurdle based on a compound annual growth rate in EPS of 10% over the performance period ending in July 2012. These options will lapse to the extent the EPS performance hurdle is not satisfied. The EPS hurdle was selected for senior executive options as the most appropriate measure relative to other possible measures. Unlike the CEO’s options, there is no share price trigger for any of these options, the Board having taken the view that a more specific focus on earnings rather than the share price was preferable for this group of executives. As with other options granted under the MEIP, each option entitles the holder to acquire one fully paid ordinary share in the Company, subject to the satisfaction of the relevant performance conditions and the payment of the exercise price. For the 2010 Tranche E Options the exercise price is $4.10 which is the same as the IPO listing price in November 2009. Set out below is a summary of the performance hurdle and the performance period for options granted to senior executives other than the CEO. Financial year of grant Value of options at grant date Valuation of each option at grant date Number of options granted Exercise price Applicable hurdles Potential time of vesting 2010 Tranche E $4,100,000 $1.19 3,445,379 $4.10 EPS Hurdle End of Perf. Period – July 2012 The following table summarises the 2010 Tranche E grants made to KMP and other Company executives in November 2009. KMP N Abboud M Ashby G Travers P Winn Value of options at grant date Valuation of each option at grant date Number of options granted Exercise price Applicable hurdles Potential time of vesting $500,000 $500,000 $500,000 $500,000 $1.19 $1.19 $1.19 $1.19 420,168 420,168 420,168 420,168 $4.10 EPS Hurdle End of Perf. Period – July 2012 $4.10 EPS Hurdle End of Perf. Period – July 2012 $4.10 EPS Hurdle End of Perf. Period – July 2012 $4.10 EPS Hurdle End of Perf. Period – July 2012 The applicable performance period is the three financial years for the Company ending July 2012. The calculation of the compound annual growth rate in EPS is based on growth from the proforma FY09 fully diluted EPS of 23.5 cents, consistent with 2010 Tranche A and 2010 Tranche B grants to the CEO described above. Details of options over ordinary shares in the Company currently provided as remuneration and granted during the current year to each Director of Myer Holdings Limited and each of the KMP of the Company are set out on page 51. Further information on the MEIP is set out in note 38 to the financial statements. Long Term Incentives – New FY12 MEIP As discussed on page 43, the Board has approved a new long term incentive plan, which is designed to encourage Myer’s senior executives to create and deliver sustained shareholder returns and to reward executives. The plan involves the grant of performance rights under the MEIP, which provide the executive with the right to acquire a share in the Company if certain performance conditions are satisfied. The Board has selected around 400 senior executives to participate in the plan, based on role, accountability and ability of the individual to contribute to the medium and longer‑term success of the Group. As announced on 10 August 2011, this offer includes the proposed grant of performance rights to the value of $2,700,000 to the CEO which comprises the long term incentive component of his remuneration for the duration of his revised employment contract. The grant of these performance rights to the CEO is subject to shareholder approval at the November 2011 Annual General Meeting. No further award of performance rights is envisaged for the CEO for the duration of his renewed contract. Before the performance rights can be exercised, certain performance conditions need to be satisfied. These performance conditions are based on Myer’s performance over a 3‑year period. If Myer performs better than its identified peer companies and certain minimum thresholds over that period are met then shareholders will benefit and executives will benefit as well by being provided with shares in the Company when the performance rights are exercised. The number of performance rights that vest will depend on how well Myer has performed during the performance period. For superior performance, 100% of the performance rights will vest. Only a percentage of performance rights will vest for performance below that level. If Myer does not achieve certain minimum thresholds then all the performance rights will lapse and no performance rights can vest. If a portion of the performance rights do not vest following the end of the performance period, then that portion of the performance rights that are unvested will lapse immediately and there will be no re‑testing at a later date. During the performance period participants will not be able to sell, assign or otherwise deal in their performance rights. They will not be entitled to any dividends or distributions or exercise any voting rights. Generally, the performance rights will lapse on cessation of employment if they have not been exercised (whether vested or unvested before that time). Subject to applicable law, the Board has the power to allow an executive to keep some, or all of their performance rights on cessation (although the discretion is only likely to be exercised, if at all, in exceptional circumstances). 11141_MYER_AR11_Financials_PPv1.indd 49 10/10/11 10:57 AM 50 My er Holdings Annual Report 2011 l i M i ted Remuneration Report continued FY12 MEIP performance conditions Other than for the CEO, there are two performance conditions that apply to the FY12 performance rights based on EPS and TSR performance. The performance rights are allocated on an equal weighting of 50% to each of the EPS Hurdle and the TSR Hurdle which are described below and these will be assessed separately, meaning that both hurdles do not need to be satisfied for any of an executive’s performance rights to vest. This means that it is possible for some or all of the performance rights with an EPS Hurdle to vest, while none of the performance rights with a TSR Hurdle vest (and vice versa). The EPS Hurdle The EPS Hurdle seeks to align the interests of the holders of performance rights with the financial performance of the Company. It does this by providing that the EPS performance rights can only be exercised if the Company achieves the EPS Hurdle that has been set by the Board. The EPS Hurdle is based on a minimum achieved compound annual growth rate (CAGR) in the Company’s fully diluted EPS over the performance period. The base number will be the Company’s fully diluted EPS calculated on the Company’s final audited results for the financial year ending 30 July 2011. The CAGR from this base will be calculated on the Company’s fully diluted EPS using the Company’s final audited results for the financial year ending 26 July 2014. The resulting CAGR will be used to determine the level of vesting for the performance rights with an EPS Hurdle. The table below sets out the percentage of performance rights that will vest depending on the Company’s performance against the EPS Hurdle over the performance period, with a linear progression through the various threshold points. EPS Hurdle rate (compound annual growth over the performance period) % of EPS performance rights that will vest1 Less than 5.0% At 5.0% From 5% to 10% pro‑rata vesting of rights Nil 50% of the number of EPS performance rights Pro‑rata with a linear progression between 50% and up to 100% of the number of EPS performance rights e.g. at 7% compound annual growth rate, 70% of EPS performance rights vest 10% or greater 100% of the number of EPS performance rights 1 The number of performance rights will be rounded down to the nearest whole number. The TSR Hurdle The TSR Hurdle also seeks to align the interests of the holders of performance rights with the interests of the Company’s shareholders. It does this by providing that the performance rights will only be exercised if the TSR for shares compares favourably to the TSR for investments in a peer group of companies. The Board has established a peer group of companies against which the Company’s TSR performance will be compared. TSR is a measure of the return or growth in the value of a share to a shareholder over a performance period on a share held for that period. It is the annualised return to shareholders, including all share price changes and reinvestment of distributions (including dividends). This figure is calculated pre‑tax and combines share price and distributions (including dividends) paid to show the total return to the shareholder. The calculation assumes that the distribution is reinvested into shares on the day it is paid and at the close price on that day. TSR was chosen as a performance measure after the Board sought independent remuneration advice from Mercer (Australia) Pty Ltd. TSR was considered a relevant market based performance measure used by many ASX listed companies. The TSR peer group The table below sets out the peer group for the FY12 MEIP offer. If any of these organisations cease to exist as entities at any time during the performance period, the size of the peer group may be maintained by additions determined by the Board. In selecting the TSR Peer group, the Board sought independent advice from remuneration consultants Mercer (Australia) Pty Ltd. The composition of the group reflects measures of relative sales and market capitalisation as well as industry type that is complementary in nature to the Company’s business. It includes companies that are consumer facing, have a service orientation and/or are retail in nature with either product or services provided as part of their core offer. Entity – peer group Air New Zealand Ltd AP Eagers Ltd Australian Pharmaceutical Industries Ltd Automotive Holdings Group Ltd Bendigo and Adelaide Bank Ltd Billabong International Ltd Coca‑Cola Amatil Ltd David Jones Ltd Flight Centre Ltd Foster’s Group Ltd Metcash Ltd Tabcorp Holdings Ltd Specialty Fashion Group Ltd GUD Holdings Ltd Harvey Norman Holdings Ltd JB Hi‑Fi Ltd Pacific Brands Ltd Tatts Group Ltd Woolworths Ltd Breville Group Ltd Premier Investments Ltd Oroton Group Ltd Wesfarmers Ltd STW Communications Group Ltd 11141_MYER_AR11_Financials_PPv1.indd 50 10/10/11 10:57 AM 51 The table below sets out the percentage of the performance rights subject to a TSR Hurdle that will vest depending on the Company’s performance against the TSR Hurdle over the performance period. For any of these performance rights to vest, the Company’s TSR performance needs to be at least at the 50th percentile of the peer group for the performance period. TSR percentile ranking % of TSR performance rights that will vest Below 50th From 50th to 75th 75th and above Nil Pro‑rata with a linear progression between 50% and up to 100% of the number of TSR performance rights 100% The performance rights to be offered to the CEO will have the same EPS Hurdle and TSR Hurdle although there will be two additional hurdles that the CEO must satisfy before any of these performance rights can be exercised, regardless of performance against the TSR and EPS Hurdles. These additional hurdles require the CEO to develop and deliver a succession plan for the role of the CEO by the conclusion of the performance period and to comply with the terms of his employment contract. The Board has established a framework with the CEO that sets out the Board’s expectations on delivery of a succession plan. This includes regular milestone reviews to assess progress against the succession plan. If the succession plan is delivered before the expiry of the performance period and the Board elects to terminate the CEO’s new contract early, the CEO may retain a prorated number of performance rights based on completed months of service of the contract period. Any pro‑rata performance rights earned by the CEO must be retained until the expiry of the full performance period of three years. The only exception to this requirement would be, subject to Board approval, a request by the CEO to exercise a proportion of his rights to meet any tax liability from the vesting of the rights. Testing the TSR and EPS Hurdles Following the end of the performance period for performance rights and after the Company has lodged its full year audited financial results for 2014 with the ASX, the Board will test the performance conditions and will determine how many performance rights (if any) are eligible to vest. There will be no retesting of the performance conditions at a later date if they are not fully satisfied. Summary of options granted, vested and lapsed for the reporting period Number of options granted during the period Value of options at grant date Number of options vested during the period 1 Number of options lapsed during the period Value at lapsed date Name Directors of Myer Holdings Limited H McDonald B Brookes A Brennan T Flood C Froggatt P Hay R Myer – – – – – – – Other Key Management Personnel of the Company N Abboud M Ashby G Travers P Winn Other Company Executives N Merola – – – – – – – – – – – – – – – – – 480,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 B Brookes held options which vested during the year which were granted to him in FY2007. N Abboud, M Ashby, G Travers and P Winn held options granted in FY2007 and FY2008, which vested on 31 July 2011 (outside the reporting period). As a consequence, no options held by these executives vested during the reporting period. 11141_MYER_AR11_Financials_PPv1.indd 51 10/10/11 10:57 AM 52 My er Holdings Annual Report 2011 l i M i ted Remuneration Report continued The assessed fair value at grant date of options granted to KMP and company executives is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. Fair values at grant date are independently determined using an option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk‑free interest rate for the term of the option. Shares provided on exercise of options Details of ordinary shares in the Company provided as a result of the exercise of options to each Director of the Company, KMPs and other Company executives are set out below. Name Directors of Myer Holdings Limited Number of ordinary shares provided on exercise of options during the period 1 Value at exercise date 2 H McDonald B Brookes A Brennan T Flood C Froggatt P Hay R Myer Other Key Management Personnel of the Company N Abboud M Ashby G Travers P Winn Other Company Executives N Merola – 480,000 – – – – – 30,000 80,000 – – – – $1,550,400 – – – – – $25,800 $40,000 – – – 1 2 The number of shares provided on exercise of options are on a one‑for‑one basis. The value at exercise date of options that were granted in prior periods as part of remuneration and were exercised during the year has been determined as the intrinsic value of the options at that date. This represents the excess of market value of the share acquired over the exercise price paid. The amounts paid per ordinary share by Directors, other Key Management Personnel and other Company executives on the exercise of options at the date of exercise were as follows: Financial year of grant 2007 Grant 2009 (23 Jan) Grant Number of ordinary shares provided on exercise of options during the period Amount paid per share on exercise of options 480,000 110,000 $0.01 $3.00 No amounts are unpaid on any shares provided on the exercise of options. Details of remuneration: bonuses and share‑based compensation benefits For each bonus and grant of options included in this report, the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage and value that was forfeited because the person did not meet the service and performance criteria is set out below. Bonuses are payable in the year following the period in which they are earned. Options vest provided the vesting conditions are met (see pages 47 to 49). No options will vest if the conditions (either service or performance) are not satisfied, therefore the minimum value of the options yet to vest is nil. The maximum value of the options yet to vest has been determined as the amount of the grant date fair value of the options that is yet to be expensed. 11141_MYER_AR11_Financials_PPv1.indd 52 10/10/11 10:57 AM 53 STI / Bonus1 Share‑based compensation benefits (options) Achieved 2011 % Forfeited 2011 % Target value 2011 $ Forfeited Value 2011 $ Year granted Vested % Forfeited % Name H McDonald B Brookes T Flood N Abboud – 0% – 0% – – – 100% 1,709,400 1,709,400 – – – 100% 352,500 352,500 M Ashby 0% 100% 397,500 397,500 G Travers 0% 100% 427,500 427,500 P Winn 0% 100% 427,500 427,500 N Merola 0% 100% 107,160 107,160 The remaining financial years in which options may vest Maximum total value of grant yet to vest 3 $ 2012 – 2013–2014 894,546 2011 2012 2013 2014–2015 2012–2013 2012 2013 – – – 118,022 2,407 – – 2012–2013 26,741 2013 2012 2013 2014–2015 2012–2013 2014–2015 2012 – – – 100,175 13,370 9,058 – 2008 2010 2007 2008 2010 2009 2008 2007 2010 2008 2010 2007 2010 2009 2008 2009 2007 93% 0% 100% 93% 0% 0% 33% 95% 0% 33% 0% 95% 0% 0% 33% 0% 92% – – – – – – – – – – – – – – – – – 1 The % of STIs achieved and forfeited for 2010 are based on performance against ’at target’ performance as explained on pages 42 to 43. 2 N Merola ceased employment with the Group on 31 July 2011. 3 The maximum total value of grant yet to vest represents the amount to be expensed under the relevant accounting standard based on expectations of how many options are expected to vest. Loans to Directors and executives Information on any loans to Directors and executives, including amounts, interest rates and repayment terms are set out in note 26(c) to the financial statements. Dealing in securities Under the Company’s Guidelines for Dealing in Securities, Directors and senior executives are prohibited from entering into hedging arrangements with respect to the Company’s securities. A copy of the Guidelines for Dealing in Securities is available on the Myer website. Escrow arrangements for the Chairman and management Each of the Chairman, the CEO and certain specified executives who report directly to the CEO (Reporting Managers) agreed to a voluntary escrow arrangement with the Company under which they were restricted from dealing in a specified number of shares held by them, following the listing of the Company. The Reporting Managers were restricted from dealing in their shares from the date of listing of the Company until the commencement of the first Board approved trading window following the release to the ASX of the Company’s audited results for the financial year ending 31 July 2010. The Chairman and CEO had the same arrangement, save that they agreed to an extended escrow period of 18 months from the listing of the Company. All escrow restrictions agreed at the time of listing of the Company have now lapsed. ASX Corporate Governance Principles and Recommendations The Board is committed to creating a fair and inclusive environment that embraces diversity and recognises its contribution to the Company’s commercial success. The Board acknowledges the inclusion of diversity recommendations in the ASX Corporate Governance Principles. The Company reports annually to the Federal Government Equal Opportunity for Women Agency (the Agency) with respect to gender and diversity in the company. In our most recent report to the Agency we have focussed on diversity issues concerning the representation of women in management roles across the business, recruitment and development initiatives and workplace flexibility, particularly having regard to flexibility related to meeting parenting challenges as well as return to work arrangements for those employees who have taken parental leave. We have recently joined with other businesses to commit to the challenge of providing work opportunities for Indigenous Australians and are examining the development of our ‘volunteering’ policy. We believe diversity will be reflected in a range of initiatives we undertake including these mentioned. The Company will draw from its existing reporting obligations as well as a range of these other initiatives in developing appropriate objectives in respect of diversity, and will provide a more detailed report on diversity in our FY12 Annual Report. 11141_MYER_AR11_Financials_PPv1.indd 53 10/10/11 10:57 AM 54 My er Holdings Annual Report 2011 l i M i ted Financial Report Myer Holdings Limited ABN 14 119 085 602 Annual financial report for the period ended 30 July 2011 Contents Financial statements Income statement Statement of comprehensive income Balance sheet Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members Page 55 55 56 57 58 59 60 110 111 These financial statements are the consolidated financial statements of the consolidated entity consisting of Myer Holdings Limited and its subsidiaries. The financial statements are presented in Australian currency. Myer Holdings Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office is: Myer Holdings Limited Level 7, 800 Collins Street Docklands, VIC, 3008 A description of the nature of the consolidated entity's operations and its principal activities is included in the Directors’ Report on pages 35 to 39, which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 5 October 2011. The Directors have the power to amend and reissue the financial statements. 11141_MYER_AR11_Financials_PPv1.indd 54 10/10/11 10:57 AM Income statement For the period ended 30 July 2011 Total sales value (excluding GST) Concession Sales Sale of goods (excluding GST) Sales revenue deferred under customer loyalty program Revenue from sale of goods (excluding GST) Other operating revenue (excluding finance revenue) Cost of goods sold Other income Operating gross profit Selling expenses Administration expenses Store closure and restructuring costs Profit on sale of financial asset Earnings before interest and tax before non-recurring Initial Public Offering (IPO) transaction costs and related charges Finance revenue Finance costs Net finance costs Profit before income tax before non-recurring IPO transaction costs and related charges Income tax expense Profit for the period before non-recurring IPO transaction costs and related charges IPO transaction costs and other non‑recurring IPO related charges (after tax) Profit for the period Profit is attributable to: Owners of Myer Holdings Limited Non‑controlling interests Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company Basic earnings per share Diluted earnings per share The above income statement should be read in conjunction with the accompanying notes. 55 Notes 5 5 5 5 5 6 5 5 6 7 6 Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 3,158,774 3,324,240 (451,867) (449,950) 2,706,907 2,874,290 (40,104) (49,256) 2,666,803 2,825,034 109,529 103,822 (1,551,112) (1,672,073) 46,410 60,927 1,271,630 1,317,710 (717,063) (729,956) (295,633) (317,449) (10,476) 11,680 – – 260,138 270,305 2,169 2,725 (37,650) (44,570) (35,481) (41,845) 224,657 228,460 (61,470) (64,926) 163,187 163,534 (3,522) (96,352) 159,665 67,182 159,724 67,182 (59) – 159,665 67,182 Cents Cents 27.4 27.3 12.3 12.1 11141_MYER_AR11_Financials_PPv1.indd 55 10/10/11 10:57 AM 56 My er Holdings Annual Report 2011 l i M i ted Statement of comprehensive income For the period ended 30 July 2011 Profit for the period Other comprehensive income Cash flow hedges Non‑recurring IPO related transfers to profit and loss Actuarial gains/(losses) on retirement benefit obligation Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income for the period Total comprehensive income for the period is attributable to: Owners of Myer Holdings Limited Non‑controlling interests Notes 24(b) 24(b) 22(f ) 24(b) 7(d) Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 159,665 67,182 (2,893) – 183 (85) 106 (2,689) 156,976 8,478 29,019 (127) – (11,249) 26,121 93,303 157,121 93,303 (145) – 156,976 93,303 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 11141_MYER_AR11_Financials_PPv1.indd 56 10/10/11 10:57 AM Balance sheet As at 30 July 2011 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Total current assets Non-current assets Other financial assets Derivative financial instruments Property, plant and equipment Deferred tax assets Intangible assets Other Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Provisions Other Total current liabilities Non-current liabilities Borrowings Provisions Deferred income Other Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Retained profits/(losses) Reserves Capital and reserves attributable to owners of Myer Holdings Limited Non‑controlling interests Total equity The above balance sheet should be read in conjunction with the accompanying notes. 57 Consolidated Notes 2011 $'000 2010 $'000 8 9 10 12 11 13 14 15 16 11 17 18 20 21 23 24 24 37,274 28,216 381,261 446,751 – 258 105,834 24,045 352,813 482,692 6,004 549 535,139 468,050 47,380 70,837 943,880 921,020 4,554 4,762 1,531,211 1,471,222 1,977,962 1,953,914 416,032 437,568 7,476 33,897 90,586 4,199 1,208 9,446 104,451 4,741 552,190 557,414 419,591 419,919 49,391 62,448 33,012 60,494 57,792 855 564,442 539,060 1,116,632 1,096,474 861,330 857,440 519,479 349,396 517,128 320,470 (15,120) 19,842 853,755 857,440 7,575 – 861,330 857,440 11141_MYER_AR11_Financials_PPv1.indd 57 10/10/11 10:57 AM 58 My er Holdings Annual Report 2011 l i M i ted Statement of changes in equity For the period ended 30 July 2011 Contributed equity $'000 Notes Reserves $'000 Consolidated Retained earnings $'000 Non‑ controlling interests $'000 Balance as at 25 July 2009 84,946 (19,270) 314,446 Total comprehensive income for the period – 26,248 67,055 Transactions with owners in their capacity as owners Contributions of equity, net of transaction costs Dividends provided for or paid Employee share options Balance as at 31 July 2010 Total comprehensive income for the period Transactions with owners in their capacity as owners Contributions of equity, net of transaction costs Put option to acquire non‑controlling interest Non‑controlling interest on acquisition of subsidiary Dividends provided for or paid Employee share options 23 25 24 23 24 31 25 24 432,182 – – 432,182 – – 12,864 12,864 – (61,031) – (61,031) 517,128 19,842 320,470 2,351 – (31,650) – – – – – (130,981) (440) – – – – – Balance as at 30 July 2011 519,479 (15,120) 349,396 2,351 (32,090) (130,981) The above statement of changes in equity should be read in conjunction with the accompanying notes. Total $'000 380,122 93,303 432,182 (61,031) 12,864 384,015 857,440 – – – – – – – – – 2,351 (31,650) 7,634 7,634 – – 7,634 7,575 (130,981) (440) (153,086) 861,330 – (2,872) 159,907 (59) 156,976 11141_MYER_AR11_Financials_PPv1.indd 58 10/10/11 10:57 AM Statement of cash flows For the period ended 30 July 2011 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Other income Interest paid Tax paid 59 Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 Notes 3,095,328 3,260,846 (2,865,443) (3,027,872) 229,885 232,974 54,200 70,739 (38,190) (59,257) (18,844) (3,405) Net cash (outflow) inflow from operating activities 35 227,051 241,051 Cash flows from investing activities Proceeds from sale of financial asset Payments for property, plant and equipment Acquisition of sass & bide Payments for intangible assets Lease incentives received Return of capital received from investment Interest received Net cash (outflow) inflow from investing activities Cash flows from financing activities Proceeds from borrowings net of transaction costs Repayment of borrowings Repayment of Myer Notes Repayments of employee share loans Payment for shares acquired by the Myer Employee Share Plan Trust Proceeds from the issue of shares Non‑recurring finance costs associated with IPO Payment of costs of IPO Dividend paid Net cash (outflow) from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial period 13,280 – (136,542) (104,582) 31 (40,374) – (9,703) (29,955) 6,109 4,404 2,176 23,700 1,196 2,979 (160,650) (106,662) (2,500) 418,225 – – 115 – (645,000) (139,052) 1,905 (823) 2,351 314,632 – (22,526) (3,946) (79,658) 25 (130,981) (61,031) (134,961) (213,328) (68,560) (78,939) 105,834 184,773 Cash and cash equivalents at end of period 8 37,274 105,834 The above statement of cash flows should be read in conjunction with the accompanying notes. 11141_MYER_AR11_Financials_PPv1.indd 59 10/10/11 10:57 AM 60 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements Contents of the notes to the financial statements Page 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Summary of significant accounting policies Financial risk management Critical accounting estimates and judgements Segment information Revenue and Other Income Expenses Income tax expense Current assets – Cash and cash equivalents Current assets – Trade and other receivables Current assets – Inventories Derivative financial instruments Non‑current assets – Other financial assets Non‑current assets – Property, plant and equipment Non‑current assets – Deferred tax assets Non‑current assets – Intangible assets Current liabilities – Trade and other payables Current liabilities – Provisions Borrowings Non‑current liabilities – Deferred tax liabilities Non‑current liabilities – Provisions Non‑current liabilities – Other Non‑current liabilities – Retirement benefit obligations Contributed equity Reserves and retained profits Dividends Key Management Personnel disclosures Remuneration of auditors Contingencies Commitments Related party transactions Business combinations Subsidiaries and transactions with non‑controlling interests Deed of cross guarantee Events occurring after the reporting period Reconciliation of profit after income tax to net cash inflow from operating activities Parent entity financial information Earnings per share Share‑based payments 61 68 72 72 73 74 75 76 76 77 78 78 79 80 81 82 82 83 85 85 86 86 89 90 92 93 96 97 97 97 98 99 100 103 103 104 105 106 11141_MYER_AR11_Financials_PPv1.indd 60 10/10/11 10:57 AM 61 Shares in Myer Holdings Limited held by the Myer Equity Plans Trust are disclosed as treasury shares and deducted from contributed equity. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Myer Holdings Limited’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance costs. All other foreign exchange gains and losses are presented in the income statement on a net basis within other income or other expenses. Non‑monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non‑monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non‑monetary assets such as equities classified as available‑for‑sale financial assets are recognised in other comprehensive income. (iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: › assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and all resulting exchange differences are recognised in other comprehensive income. › › On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange difference is reclassified to profit or loss, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Myer Holdings Ltd and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Financial periods The 2011 financial period represents 52 weeks ended 30 July 2011, the comparative financial period represents 53 weeks ended 31 July 2010. Compliance with IFRSs The consolidated financial statements of Myer Holdings Limited Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets and financial assets and liabilities (including derivative instruments) at fair value through profit or loss. Critical accounting estimates The preparation of financial statements in conformity with accounting standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Myer Holdings Limited (‘Company’ or ‘parent entity’) as at 30 July 2011 and the results of all subsidiaries for the period then ended. Myer Holdings Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all those entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed, where necessary, to ensure consistency with the policies adopted by the Group. Non‑controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, statement of changes in equity and balance sheet respectively. (ii) Employee Share Trust The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. 11141_MYER_AR11_Financials_PPv1.indd 61 10/10/11 10:57 AM 62 M y e r H o l d i n g s liMi t e d Annual Report 2011 Notes to the financial statements continued 1 Summary of significant accounting policies continued (e) Revenue recognition Total sales value presented on the income statement represents proceeds from sale of goods from sales (both by Myer and concession operators) generated in Myer stores and prior to the deferral of revenue under the customer loyalty program. Concession sales presented in the income statement represents sales proceeds of concession operators within Myer stores. Total sales value is disclosed to show the total sales generated in Myer stores and provide a basis of comparison with similar department stores. Revenue from the sale of goods, excluding lay‑by transactions, is recognised at the point of sale and is after deducting taxes paid, and does not include concession sales. Allowance is made for expected sales returns based on past experience of returns and expectations about the future. A provision for sales returns is recognised based on this assessment. Revenue from lay‑by transactions is recognised as part of revenue from the sale of goods at the date upon which the customer satisfies all payment obligations and takes possession of the merchandise. Revenue from sale of goods excludes concession sales on the basis that the inventory sold is owned by the concession operator at the time of sale and not Myer. Myer’s share of concession sales is recognised as income within other operating revenue at the time the sale is made. Interest income is recognised on a time proportion basis using the effective interest method. Dividends are recognised as revenue when the right to receive payment is established. Customer loyalty program The Group operates a loyalty program where customers accumulate points for purchases made which entitle them to discounts on future purchases. The award points are recognised as a separately identifiable component of the initial sale transaction, by allocating the fair value of the consideration received between the award points and the other components of the sale such that the award points are recognised at their fair value. Revenue from the award points is recognised when the points are redeemed. The amount of revenue is based on the number of points redeemed relative to the total number expected to be redeemed. Award points expire 24 months after the initial sale. (f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exemption is made for certain temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised in other comprehensive income or directly in equity are also recognised directly in other comprehensive income or equity. (g) Leases Leases of property, plant and equipment in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases (note 29). Lease incentives received on entering into operating leases are recognised as deferred income and are amortised over the lease term. Payments made under operating leases (net of any amortised deferred income) are charged to the income statement on a straight line basis over the period of the lease. Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases. There were no finance leases in place during the reporting period. (h) Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre‑existing equity interest in the subsidiary. Acquisition‑related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition‑by‑acquisition basis, the Group recognises any non‑controlling interest in the acquiree either at fair value or at the non‑controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non‑ controlling interest in the acquiree and the acquisition‑date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). For store assets, the appropriate cash‑generating unit is an individual store. Non financial assets other than goodwill that have previously suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 11141_MYER_AR11_Financials_PPv1.indd 62 10/10/11 10:57 AM 63 (j) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. (k) Trade receivables Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Cash flows relating to short term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in the income statement within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement. (l) Inventories At the end of the reporting period, all inventories are valued at the lower of cost and net realisable value. Cost is determined using the weighted average cost method, after deducting any purchase settlement discount and including logistics expenses incurred in bringing the inventories to their present location and condition. Volume related supplier rebates and supplier promotional rebates are recognised as a reduction in the cost of inventory and are recorded as a reduction of cost of goods sold when the inventory is sold. (m) Investments and other financial assets Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held to maturity, re‑ evaluates this designation at the end of each reporting period. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading which are acquired principally for the purpose of selling in the short term with the intention of making a profit. Derivatives are also categorised as held for trading unless they are designated as hedges. (ii) Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the reporting period which are classified as non current assets. Loans and receivables are included in receivables in the balance sheet (note 9). (iii) Held to maturity investments Held to maturity investments are non‑derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. (iv) Available for sale financial assets Available for sale financial assets are non derivatives that are either designated in this category or not classified in any of the other categories. They are included in non current assets unless management intends to dispose of the investment within 12 months of the end of the reporting period. Recognition and derecognition Purchases and sales of investments are recognised on trade‑date, the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement Available for sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value, unless they are equity securities that do not have a market price quoted in an active market and whose fair value cannot be reliably measured. In that case they are carried at cost. Loans and receivables and held to maturity investments are carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category, including interest and dividend income, are presented in profit or loss within other income or other expenses in the period in which they arise. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences are recognised in profit or loss and other changes in carrying amount are recognised in equity. Changes in the fair value of other monetary and non‑ monetary securities classified as available for sale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in profit or loss as gains and losses from investment securities. Details on how the fair value of financial instruments is determined are disclosed in note 2. Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or Group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is reclassified from equity and recognised in profit or loss as a reclassification adjustment. Impairment losses recognised in profit or loss on equity instruments classified as available for sale are not reversed through profit or loss. 11141_MYER_AR11_Financials_PPv1.indd 63 10/10/11 10:57 AM 64 M y e r H o l d i n g s liMi t e d Annual Report 2011 Notes to the financial statements continued 1 Summary of significant accounting policies continued (n) Derivatives and hedging activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: › hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges); or hedges of the cash flows or recognised assets or liabilities and highly probable forecast transactions (cash flow hedges). › The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessments, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The full fair value of a hedging derivative is classified as a non‑current asset or liability when the remaining maturity of the hedged item is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. (i) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in profit or loss within finance costs, together with changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognised in profit or loss. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedge item for which the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective interest rate. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of the interest rate swaps hedging variable rate borrowings is recognised in profit or loss within finance costs. When the forecast transaction that is hedged results in the recognition of a non‑financial asset (for example, inventory or fixed assets) the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory, or as depreciation in the case of fixed assets. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. (iii) Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. (o) Property, plant and equipment Property, plant and equipment is stated at cost less depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight line method to allocate their cost net of their residual values, over their estimated useful lives, as follows: › › › › Buildings Fixtures and fittings Plant and equipment Leasehold improvements 40 years 3 – 12.5 years 10 – 20 years 20 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. Non-current assets held for sale Non‑current assets are classified as held for sale and stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. Non‑current assets are not depreciated or amortised while they are classified as held for sale. Non‑current assets classified as held for sale are presented separately from the other assets in the balance sheet. (p) Intangible assets (i) Goodwill Goodwill is measured as described in note 1(h). Goodwill on acquisition of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (ii) Brand names and trade marks Certain Group brands are considered to have indefinite lives. These brands are not considered to have foreseeable brand maturity dates, and have accordingly been assessed as having indefinite useful lives and are therefore not amortised. Instead, the brand names are tested for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired, and are carried at cost less accumulated impairment losses. Other brands have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of brands over their estimated useful life of 20 years. (iii) Computer software All costs directly incurred in the purchase or development of major computer software or subsequent upgrades and material enhancements, which can be reliably measured and are not integral to a related asset, are capitalised as intangible assets. Direct costs may include internal payroll and on‑costs for employees directly associated with the project. Costs incurred on computer software maintenance or during the planning phase are expensed as incurred. Computer software is amortised over the period of time during which the benefits are expected to arise, being 5 to 10 years. 11141_MYER_AR11_Financials_PPv1.indd 64 10/10/11 10:57 AM 65 (iv) Lease Rights Lease rights represent the amount paid up‑front to take over store site leases from the existing lessee where such payments are in addition to the ongoing payment of normal market lease rentals. Lease rights are amortised over the term of the lease plus any renewal options reasonably certain to be utilised at the time of acquisition of the lease rights, being 13 to 17 years. (q) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial period which are unpaid. The amounts are unsecured and are usually paid within 30 to 90 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. (r) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (s) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (t) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of Management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The Group is self‑insured for costs relating to workers’ compensation and general liability claims in certain states. Provisions are recognised based on claims reported, and an estimate of claims incurred but not yet reported, prior to balance date. These provisions are determined utilising an actuarially determined method, which is based on various assumptions including but not limited to future inflation, average claim size and claim administrative expenses. These assumptions are reviewed annually and any reassessment of these assumptions will affect the workers’ compensation expense. (u) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non‑monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short‑term employee benefit obligations are presented as payables. (ii) Other long-term employee benefit obligations The liability for long service leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Retirement benefit obligations The Group contributes to a number of superannuation funds that have been established to provide benefits for employees. Apart from one defined benefit fund, with a range of member categories, all funds are defined contribution funds, and contributions to them are recognised as an expense as they become payable. The defined benefit fund that the Group contributes to is currently administered through Mercer Human Resource Consulting within a Mercer Master Trust arrangement on behalf of Myer. The defined benefit fund provides defined lump sum pension benefits based on years of service and final average salary. Myer defined benefit members who were members of the Coles Myer Defined Benefit Fund were transferred to the Myer Fund effective 2 June 2006. The Fund is closed to new members and only existing Defined Benefit members were eligible for membership. A liability or asset in respect of the defined benefit fund is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the end of the reporting period less the fair value of the fund’s assets at that date and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments that arise from membership of the fund to the end of the reporting period, calculated annually by independent actuaries using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, outside profit or loss directly in the statement of comprehensive income. (iv) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing based on a formula that takes into consideration the profit attributable to the Group’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. 11141_MYER_AR11_Financials_PPv1.indd 65 10/10/11 10:57 AM 66 M y e r H o l d i n g s liMi t e d Annual Report 2011 Notes to the financial statements continued (w) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial period but not distributed at balance date. (x) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: › › the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial period, adjusted for bonus elements in ordinary shares issued during the period and excluding treasury shares (note 23). (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: › the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. › (y) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case, it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities, which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. (z) Rounding of amounts The Group has taken advantage of Class Order 98/100, issued by the Australian Securities and Investments Commission (ASIC), relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. 1 Summary of significant accounting policies continued (u) Employee benefits continued (v) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. (vi) Share-Based Payments Share‑based compensation benefits are provided to employees via the Myer Equity Incentive Plan. Information relating to these schemes is set out in note 38. The fair value of options granted under the plan is recognised as an employee benefit expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted, which includes any market performance conditions but excludes the impact of any services and non‑market performance vesting conditions and the impact of any non‑vesting conditions. Non‑market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non‑market vesting conditions. It recognises the impact of revisions to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. The Myer Equity Incentive Plan is administered by the Myer Equity Incentive Plan Trust see note 1(b)(ii). When options are exercised, the trust transfers the appropriate number of shares to the employee. The proceeds received net of any directly attributable transaction costs are credited directly to equity. (vii) Employee Share Acquisition Plan – Gift shares At the time of the Initial Public Offer of shares in the Company and as disclosed in the associated prospectus, eligible employees were entitled to participate in the Employee Gift Offer. Eligible employees were offered the opportunity to acquire, at no cost, the nearest number of shares up to the value of $725. The cost of the shares issued was expensed to the Income Statement. (v) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity instruments, for example as the result of a share buy‑back or a share‑based payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Myer Holdings Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of Myer Holdings Limited. 11141_MYER_AR11_Financials_PPv1.indd 66 10/10/11 10:57 AM 67 (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 July 2011 reporting periods. The Group’s and the parent entity’s assessment of the impact of these new standards and interpretations, that were considered relevant for the consolidated entity, is set out below. (i) AASB 9 Financial Instruments 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010‑7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective from 1 January 2013) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. When adopted, the standard will affect in particular the Group’s accounting for its available for sale financial assets, since AASB 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available for sale debt investments, for example will therefore have to be recognised directly in profit or loss. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. (ii) AASB 2009‑14 Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement (effective from 1 January 2011) In December 2009, the AASB made an amendment to Interpretation 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The amendment removes an unintended consequence of the interpretation related to voluntary prepayments when there is a minimum funding requirement in regard to the entity’s defined benefit scheme. It permits entities to recognise an asset for a prepayment of contributions made to cover minimum funding requirements. The Group does not make any such prepayments. The amendment is therefore not expected to have any impact on the Group’s financial statements. The Group intends to apply the amendment from 31 July 2011. (iii) AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010‑2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective from 1 July 2013) On 30 June 2010, the AASB officially introduced a revised differential reporting framework in Australia. Under this framework, a two‑tier differential reporting regime applies to all entities that prepare general purpose financial statements. Myer Holdings Limited is listed on the ASX and is not eligible to adopt the new Australian Accounting Standards – Reduced Disclosure Requirements. The two standards will therefore have no impact on the financial statements of the entity. (ab) Parent entity financial information The financial information for the parent entity, Myer Holdings Limited, disclosed in note 36 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries (i) Investment in subsidiaries are accounted for at cost in the financial statements of Myer Holdings Limited. (ii) Tax consolidation legislation Myer Holdings Limited and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Myer Holdings Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand‑alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Myer Holdings Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly‑owned entities fully compensate Myer Holdings Limited for any current tax payable assumed and are compensated by Myer Holdings Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Myer Holdings Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly‑owned entities’ financial statements. The funding amounts are recognised as current intercompany receivables or payables. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly‑owned tax consolidated entities. (ac) Comparative amounts Where current period balances have been classified differently within current period disclosures when compared to the prior period, comparative disclosures have been restated to ensure consistency of presentation between periods. 11141_MYER_AR11_Financials_PPv1.indd 67 10/10/11 10:57 AM 68 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 2 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and cash flow and fair value interest rate risk); credit risk; and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risk, and an aging analysis for credit risk. Risk management is carried out by the Company under policies approved by the Board of Directors. The Company identifies, evaluates and hedges financial risks. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, and use of financial instruments and non‑derivative financial instruments. (a) Market risk (i) Foreign exchange risk Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. The Group sources inventory purchases overseas and is exposed to foreign exchange risk, particularly in relation to currency exposures to the US dollar. To minimise the effects of a volatile and unpredictable exchange rate it is Group policy to enter into forward exchange contracts in relation to the Group’s overseas purchases for any 12 month period. The actual level of cover taken fluctuates depending on the period until settlement of the foreign currency transaction, within the board approved hedging policy. This policy allows cover to be taken on a sliding scale between 25 ‑100% depending on the period to maturity (up to 12 months). The Group’s exposure to foreign currency risk at the end of the reporting period was as follows: Trade payables Forward exchange contracts 30 July 2011 31 July 2010 USD $’000 13,208 76,350 EURO $’000 264 – HKD $’000 82 – USD $’000 9,946 82,300 EURO $’000 235 1,490 HKD $’000 25 – The parent entity’s financial assets and liabilities are denominated in Australian dollars. Group sensitivity Based on the financial instruments held at 30 July 2011, had the Australian dollar weakened/strengthened by 10% against the US dollar with all other variables held constant, the Group’s post‑tax profit for the period would have been $0.7 million higher/$0.9 million lower (2010: $0.7 million higher/$0.9 million lower), mainly as a result of foreign exchange gains/losses on translation of US dollar denominated financial instruments as detailed in the above table. Other components of equity would have been $3.6 million higher/$3.4 million lower (2010: $5.3 million higher/$6.5 million lower) had the Australian dollar weakened/strengthened by 10% against the US dollar, arising from foreign exchange contracts designated as cash flow hedges. The Group’s exposure to other foreign exchange movements is not material. These sensitivities were calculated based on the Group’s period end spot rate for the applicable reporting period. (ii) Cash flow and fair value interest rate risk The Group is exposed to interest rate risk as it borrows funds at floating interest rates. Borrowings issued at floating rates expose the Group to cash flow interest rate risk. The risks are managed by the use of floating to fixed interest rate swap contracts. During the period, the Group policy was to fix the rates between 0 to 30% of its Term Debt Facility. This policy had been complied with at the period end. Interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. As at the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: Borrowings – Variable Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 30 July 2011 31 July 2010 Weighted average interest rate % 6.7% 6.2% Weighted average interest rate % 7.0% 6.6% Balance $’000 419,591 (80,000) 339,591 Balance $’000 419,919 (50,000) 369,919 The weighted average interest rates noted above for both borrowings and swaps are inclusive of margins applicable to the underlying variable rate borrowings. 11141_MYER_AR11_Financials_PPv1.indd 68 10/10/11 10:57 AM 69 An analysis by maturities is provided in (c) below. Interest rate exposure is evaluated regularly to confirm alignment with Group policy and to ensure the Group is not exposed to excess risk from interest rate volatility. At 30 July 2011, if interest rates had changed by +/‑ 10% from the period end rates with all other variables held constant, post‑tax profit for the period would have been $1.2 million higher/$1.2 million lower (2010: change of +/‑ 10%: $1.2 million higher/$1.2 million lower), mainly as a result of higher/lower interest expense on borrowings. Other components of equity would have been $0.3 million lower/$0.3 million higher (2010: $0.5 million lower/$0.5 million higher) mainly as a result of an increase/decrease in the fair value of the cash flow hedges of borrowings. The range of sensitivities have been assumed based on the Group’s experience of average interest rate fluctuations in the applicable reporting period. (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. Sales to retail customers are primarily required to be settled in cash or using major credit cards, mitigating credit risk. Where transactions are settled by way of lay‑by arrangements, revenue is not recognised until full payment has been received from the customer and goods collected. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of the financial assets as disclosed in notes 8, 9, 11 and 12. The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings as detailed below, historical information about receivables default rates and current trading levels. Based on the credit history of these classes, it is expected that these amounts will be received and are not impaired. Trade receivables 0 – 30 days 30 – 60 days 60 – 90 days 90+ days Total trade receivables Cash at bank and short term bank deposits AAA AA A Derivative financial assets AAA AA A Consolidated 2011 $’000 14,126 573 223 1,450 16,372 – 37,274 – 37,274 – 258 – 258 2010 $’000 13,704 1,474 217 1,162 16,557 – 105,834 – 105,834 – 549 – 549 11141_MYER_AR11_Financials_PPv1.indd 69 10/10/11 10:57 AM 70 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 2 Financial risk management continued (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due and due to close out market positions. Due to the seasonal nature of the retail business, the Group has in place flexible funding facilities to ensure liquidity risk is minimised. Financing arrangements The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Floating rate Expiring within one year (revolving cash advance facility) Expiring beyond one year (revolving cash advance facility) Consolidated 2011 $’000 2010 $’000 50,000 200,000 250,000 – 200,000 200,000 The long term revolving cash advance facility has two tranches each comprising $100 million and are set to expire 2 June 2014 and 2 June 2015 respectively. The long term revolving cash advance facilities may be drawn at any time and are subject to the Group continuing to meet its covenants. At balance date, these facilities remain undrawn. In addition to the above, the Group entered into a 1 year $50 million revolving credit facility on 13 April 2011 for the purpose of funding the acquisition of the sass & bide business. Maturities of financial liabilities The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for: (a) all non‑derivative financial liabilities, and (b) net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant. For interest rate swaps, the cash flows have been estimated using forward interest rates applicable at the end of the reporting period. Contractual maturities of financial liabilities 30 July 2011 Non-derivatives Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 Non‑interest bearing 446,585 – – 31,650 Variable rate Fixed rate 5,742 20,462 24,396 471,799 – – – – Total non-derivatives 452,327 20,462 24,396 503,449 Derivatives Net settled (interest rate swaps) (135) 148 Gross settled – (inflow) – outflow Total derivatives (54,518) (15,570) 61,463 6,810 16,726 1,304 – – – – – – – – – – – – – – – – 478,235 446,585 522,399 419,591 – – 1,000,634 866,176 13 (258) (70,088) 78,189 8,114 – 7,476 7,218 11141_MYER_AR11_Financials_PPv1.indd 70 10/10/11 10:57 AM 71 Carrying Amount (assets)/ liabilities $’000 437,568 419,919 – Contractual maturities of financial liabilities 30 July 2010 Non-derivatives Non‑interest bearing Variable rate Fixed rate Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total contractual cash flows $’000 437,568 15,094 – – – – 15,784 33,084 439,753 – – – Total non-derivatives 452,662 15,784 33,084 439,753 Derivatives Net settled (interest rate swaps) (91) (125) (275) Gross settled – (inflow) – outflow Total derivatives (66,825) (28,378) 67,893 977 28,518 15 – – (275) – – – – – – – – – – – – 437,568 503,715 – 941,283 857,487 (491) (549) (95,203) 96,411 717 – 1,208 659 (d) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 7 Financial Instruments: Disclosures requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1), (b) inputs other than quoted prices included within level 1 that are observable for the asset or liabilities either directly (as prices) or indirectly (derived from prices) (level 2), and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The following tables present the Group’s assets and liabilities measured and recognised at fair value at 30 July 2011 and 31 July 2010. Group – at 30 July 2011 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Group – at 30 July 2010 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – 258 258 7,476 7,476 – – – – Level 1 $’000 Level 2 $’000 Level 3 $’000 – – – – 549 549 1,208 1,208 – – – – 258 258 7,476 7,476 Total $’000 549 549 1,208 1,208 11141_MYER_AR11_Financials_PPv1.indd 71 10/10/11 10:57 AM 72 M y e r H o l d i n g s liMi t e d Annual Report 2011 Notes to the financial statements continued 2 Financial risk management continued (d) Fair value measurements continued The fair value of financial instruments that are not traded in an active market (for example, over‑the‑counter derivatives) is determined using valuation techniques. The Group uses quoted market prices or dealer quotes of similar instruments in order to estimate fair value for long term debt instruments held. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the end of the reporting period. These instruments are included in level 2 and comprise derivative financial instruments. The carrying amounts of trade receivables and payables are assumed to approximate their fair values due to their short term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. (ii) Impairment The Group tests annually whether goodwill and indefinite lived intangibles have suffered any impairment, in accordance with the accounting policy stated in note 1(i). The recoverable amount of cash generating units have been determined based on value in use calculations at a store level. Goodwill and certain intangibles can only be tested for impairment at the level of the Myer Group as a whole. These calculations require the use of assumptions. Refer to note 15 for details of these assumptions. Should assumptions about future cash flows prove incorrect, the Group may be at risk of impairment write‑downs. (iii) Recoverable amount of inventory Management have assessed the value of inventory that is likely to be sold below cost using past experience and judgement on the likely sell through rates of various items of inventory, and booked a provision for this amount. To the extent that these judgements and assumptions prove incorrect, the Company may be exposed to potential additional inventory write‑downs in future periods. 4 Segment information Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer that are used to make strategic decisions about the allocation of resources. The Chief Executive Officer considers the business based on total store and product portfolio, and has identified that the Group operates in Australia in the department store retail segment. As a result of the acquisition of sass & bide during the year, the Group also undertakes activities outside the department store retail business. On the basis that this aspect of the business represents less than 10% of the total Group’s operations, it has not been disclosed as a separate operating segment. 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below. Income taxes (i) The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises tax assets and liabilities based on its best estimate of the tax implications of the underlying transactions. Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the current tax provision and deferred tax assets and liabilities in the period in which the final determination is made. 11141_MYER_AR11_Financials_PPv1.indd 72 10/10/11 10:57 AM 5 Revenue and Other Income Revenue from continuing operations Sales revenue Total sales value (excluding GST) Concession Sales Sale of goods (excluding GST) Sales revenue deferred under customer loyalty program Revenue from sale of goods (excluding GST) Other revenue Concessions revenue Rental revenue Finance revenue Total revenue Other Income from continuing operations Other Other income from continuing operations includes revenue in relation to the financial services business, forfeited lay‑by deposits, customer delivery fees, commission on EFT transactions, gift card non‑redemption income and profit underpinning received in relation to the Myer Melbourne store redevelopment. Profit on sale of financial asset Net profit on sale of financial asset (refer note 12) 73 Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 3,158,774 3,324,240 (451,867) (449,950) 2,706,907 2,874,290 (40,104) (49,256) 2,666,803 2,825,034 109,329 103,712 200 110 109,529 103,822 2,169 2,725 2,778,501 2,931,581 46,410 46,410 60,927 60,927 11,680 – 11141_MYER_AR11_Financials_PPv1.indd 73 10/10/11 10:57 AM 74 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 6 Expenses Profit before income tax includes the following specific expenses: Total Depreciation, Amortisation, Write off expense 78,981 65,465 Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 Finance costs Interest and finance charges paid/payable Fair value (gains)/losses on interest rate swap cash flow hedges – transfer from equity Finance costs expensed Rental expense relating to operating leases Minimum lease payments Contingent rentals Total rental expense relating to operating leases Foreign exchange (gains)/losses Net foreign exchange (gains)/losses Net loss/(gain) on foreign currency derivatives not qualifying as hedges Defined contribution superannuation expense Impairment of assets – Inventory Employee benefits expense including defined contribution superannuation expense Store closure and restructuring costs Store closure and restructuring costs represents the write‑down of assets and inventory associated with the decision to exit a store and certain business categories, as well as redundancy costs. Profit for the period includes the following items that are unusual because of their nature, size or incidence Expenses incurred in relation to the Initial Public Offering of shares in the Company, classified as: – Administration expenses – Net Finance Costs Total expenses incurred in relation to the Initial Public Offering of shares in the Company Less: Applicable income tax benefit 37,961 (311) 37,650 44,297 273 44,570 187,311 167,443 8,287 8,537 195,598 175,980 (3,984) (9,449) – – (3,984) (9,449) 32,653 17,479 33,944 16,211 413,618 456,116 10,476 – 5,031 – 78,094 56,785 5,031 134,879 (1,509) (38,527) 3,522 96,352 In the prior year the Company listed on the Australian Securities Exchange (ASX). The Initial Public Offer of shares in the Company resulted in the Company incurring significant one‑off expenses during the current and prior period that do not form part of the ongoing operations of the business. Costs categorised as Administration expenses in the current period represent the continued charge to the income statement of the retention bonuses payable to key staff as a result of the listing of the Company. Amounts classified as Administration expenses in the prior period represent costs incurred in executing the float process ($65.8m, comprising advisors fees, registry fees, prospectus costs, offer advertising costs, etc), as well as internal costs including an expense on the issue of gift shares to employees at listing ($6.3m) and the charge to the income statement in relation to retention bonuses payable to key staff ($6.0m). IPO transaction costs were capitalised against share capital to the extent that they relate to the raising of new equity. Costs categorised as net finance costs represent the expense recognised on cancellation of interest rate swaps at refinancing, the write‑off of capitalised borrowing costs related to refinanced debt, and the recognition of the discount/premium on exchange/redemption of Myer Notes. 11141_MYER_AR11_Financials_PPv1.indd 74 10/10/11 10:57 AM 7 Income tax expense (a) Income tax expense Current tax Deferred tax Income tax expense is attributable to: Profit from continuing operations Aggregate income tax expense Income tax expense from operations before IPO costs Income tax benefit on IPO costs Deferred income tax (revenue) expense included in income tax expense comprises: (Increase) decrease in deferred tax assets (note 14) (Decrease) increase in deferred tax liabilities (note 19) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit/(loss) from continuing operations before income tax expense including IPO transaction costs and other non‑recurring IPO related charges and before income tax expense Tax at the Australian tax rate of 30% (2010: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non deductible acquisition costs Non deductible entertainment Sundry items Adjustments for current tax of prior periods Income tax expense (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity Net deferred tax – debited (credited) directly to equity (note 24(b)) (d) Tax expense (income) relating to items of other comprehensive income Cash flow hedges 75 Consolidated 2011 52 weeks $'000 2010 53 weeks $'000 42,616 17,346 59,962 59,962 59,962 61,470 13,013 13,386 26,399 26,399 26,399 64,926 (1,508) (38,527) 59,962 26,399 12,739 4,607 17,346 219,626 65,888 228 26 (531) 65,611 (5,649) 59,962 969 969 106 106 9,067 4,319 13,386 93,581 28,074 – 87 24 28,185 (1,786) 26,399 11,387 11,387 (11,249) (11,249) During a prior financial period, the Group was advised by the Australian Tax Office that they were undertaking an Audit of the Group’s income tax affairs in relation to the 2006 and 2007 income tax years. This Audit has now been finalised without material impact to the Group. The Group continues to be subject to the Australian Tax Office’s normal ongoing compliance activities. 11141_MYER_AR11_Financials_PPv1.indd 75 10/10/11 10:57 AM 76 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 8 Current assets – Cash and cash equivalents Cash on hand Cash at bank Consolidated 2011 $’000 3,046 34,228 37,274 2010 $’000 3,165 102,669 105,834 (a) Risk exposure The Group’s exposure to interest rate risk is discussed in note 2. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. 9 Current assets – Trade and other receivables Trade receivables Provision for impairment of receivables (note(a)) Employee share loans Other receivables Prepayments Consolidated 2011 $’000 17,074 2010 $’000 16,847 (702) (290) 16,372 16,557 7 4,627 7,210 11,844 28,216 285 3,072 4,131 7,488 24,045 Further information relating to loans to Key Management Personnel is set out in note 26. (a) Impaired trade receivables As at 30 July 2011, current trade receivables of the Group with a nominal value of $702 thousands (2010: $279 thousands) were impaired. The amount of the provision was $702 thousands (2010: $290 thousands). The individually impaired receivables mainly relate to wholesalers. The ageing of these receivables is as follows: 0 – 30 days 30 – 60 days 60 – 90 days 90+ days Consolidated 2011 $’000 2010 $’000 – 3 42 657 702 – – – 279 279 11141_MYER_AR11_Financials_PPv1.indd 76 10/10/11 10:57 AM (a) Impaired trade receivables continued Movements in the provision for impairment of receivables are as follows: At 31 July 2010 Provision for impairment recognised during the period Receivables written off during the period as uncollectible Unused amount reversed 77 Consolidated 2011 $’000 2010 $’000 290 456 (16) (28) 702 553 79 (342) – 290 The creation and release of the provision for impaired receivables has been included in ‘administration expenses’ in profit or loss. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. (b) Past due but not impaired As of 30 July 2011, trade receivables of $4,551 thousands (2010: $5,241 thousands) were past due but not impaired. These relate to a number of independent debtors for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows: Up to 3 months 3 to 6 months Consolidated 2011 $’000 2,594 1,957 4,551 2010 $’000 3,787 1,454 5,241 Based on the credit history of these classes, it is expected that these amounts will be received and are not impaired. (c) Foreign exchange and Interest rate risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 2. (d) Fair values and credit risk Due to the short term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of receivables mentioned above. Refer to note 2 for more information on the risk management policy of the Group and the credit quality of the entities trade receivables. 10 Current assets – Inventories Retail inventories Consolidated 2011 $’000 2010 $’000 381,261 352,813 11141_MYER_AR11_Financials_PPv1.indd 77 10/10/11 10:57 AM 78 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 11 Derivative financial instruments Non current assets Interest rate swap contracts Total non current derivative financial instrument assets Current liabilities Forward foreign exchange contracts Total current derivative financial instrument liabilities Consolidated 2011 $’000 2010 $’000 258 258 7,476 7,476 549 549 1,208 1,208 (a) Instruments used by the Group The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note 2). (i) Interest rate swap contracts Bank loans of the Group currently bear an average variable interest rate of 6.66% (2010: 6.97%). It is policy to protect part of the loans from exposure to increasing interest rates. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. Swaps currently in place cover approximately 19% (2010: 12%) of the Group’s debt facility (refer to note 18 for details of the Group’s borrowings). The notional principal amounts used in the swap agreements match the terms of the debt facilities. In relation to the debt facilities the fixed interest rates range between 4.35% and 4.75% (2010: 4.35% and 4.75%) and the variable rates under the swap agreements are the Bank Bill Swap Rate bid (BBSY Bid). The contracts require settlement of net interest receivable or payable each 3 months. The contracts are settled on a net basis. The gain or loss from remeasuring the hedging instruments at fair value is deferred in equity in the hedging reserve, to the extent that the hedge is effective, and reclassified into profit and loss when the hedged interest expense is recognised. In the period ended 30 July 2011, nil was reclassified in profit and loss (2010: $29.3 million) and included in finance cost. There was no hedge ineffectiveness in the current period. (ii) Forward exchange contracts – cash flow hedges The Group makes purchases in numerous currencies primarily US dollars. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for the ensuing financial period. The contracts are timed to mature when payments for shipments of inventory are scheduled to be made. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the cash flows occur, the Group adjusts the initial measurement of the inventory recognised in the balance sheet by the related amount deferred in equity. During the period ended 30 July 2011, a gain of $1.8 million (2010: gain of $1.6 million) was reclassified from equity and included in the cost of inventory. There was no hedge ineffectiveness in the current or prior period. (b) Risk exposures Information about the Group’s exposure to credit risk, foreign exchange and interest rate risk is provided in note 2. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivative financial assets mentioned above. 12 Non current assets – Other financial assets Available for sale financial assets Consolidated 2011 $’000 – – 2010 $’000 6,004 6,004 In a prior period, available for sale financial assets represented the consolidated entity’s interest in equity securities of Harsyn Pty Ltd (holding company of Harris Scarfe Australia Pty Ltd) and Australian Geographic Retail Pty Ltd. These equity securities do not have a quoted market price or active market, and therefore their fair value could not be reliably measured. As a result they were historically carried at cost. During the period, the interests in both companies were disposed of. 11141_MYER_AR11_Financials_PPv1.indd 78 10/10/11 10:57 AM 79 13 Non‑current assets – Property, plant and equipment Consolidated At 25 July 2009 Cost Accumulated depreciation Net book amount Period ended 31 July 2010 Opening net book amount Freehold land $’000 Freehold buildings $’000 Fixtures and fittings $’000 Plant and equipment $’000 Capital works in progress $’000 Total $’000 – – – – – – – – 241,454 192,868 74,069 508,391 (90,822) (45,870) – (136,692) 150,632 146,998 74,069 371,699 150,632 146,998 74,069 371,699 Assets reclassified from held for sale – cost 10,100 19,500 Assets reclassified from held for sale – accumulated depreciation Additions Transfer between classes Assets written off – cost Assets written off – accumulated depreciation Depreciation charge – – – – – – – – 871 104,149 (3,439) 2,840 – – 6,431 2,462 (8,636) 5,263 (1,056) – – – – (975) (26,224) (14,689) – – 29,600 (1,056) 106,751 114,053 (106,997) – – – (386) (12,075) 8,103 (41,888) Closing net book amount 10,100 17,469 228,829 137,829 73,823 468,050 At 31 July 2010 Cost 10,100 19,500 343,035 193,125 73,823 639,583 Accumulated depreciation – (2,031) (114,206) (55,296) – (171,533) Net book amount 10,100 17,469 228,829 137,829 73,823 468,050 Period ended 30 July 2011 Opening net book amount 10,100 17,469 228,829 137,829 73,823 468,050 Acquisition of subsidiary (refer note 31) Additions Transfer between classes Assets written off – cost Assets written off – accumulated depreciation Depreciation charge – – – – – – – – – – – 235 12,254 99,566 (2) 2 3,974 11,942 53,026 797 (797) (488) (39,320) (19,778) 10 4,219 80,909 105,105 (135,241) 17,351 – – – 795 (795) (59,586) Closing net book amount 10,100 16,981 301,564 186,993 19,501 535,139 At 30 July 2011 Cost 10,100 19,500 455,088 262,864 19,501 767,053 Accumulated depreciation – (2,519) (153,524) (75,871) – (231,914) Net book amount 10,100 16,981 301,564 186,993 19,501 535,139 11141_MYER_AR11_Financials_PPv1.indd 79 10/10/11 10:57 AM 80 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 14 Non current assets – Deferred tax assets The balance comprises temporary differences attributable to: Property, plant, equipment and software Employee benefits Non‑employee provisions Deferred income Amortising deductions Other Set off of deferred tax liabilities pursuant to set off provisions (note 19) Net deferred tax assets Movements: Opening balance at 31 July 2010 Credited/(charged) to profit or loss (note 7) Credited/(charged) directly to equity Credited/(charged) to other comprehensive income Acquisition of subsidiary (note 31) Closing balance at 30 July 2011 Consolidated 2011 $’000 2010 $’000 – 17,770 19,347 2,204 14,520 14,241 68,082 (20,702) 47,380 80,114 (12,739) – (126) 832 – 18,544 26,708 3,636 19,404 11,822 80,114 (9,277) 70,837 96,158 (9,067) 4,272 (11,249) – 68,082 80,114 11141_MYER_AR11_Financials_PPv1.indd 80 10/10/11 10:57 AM 81 15 Non‑current assets – Intangible assets Consolidated At 25 July 2009 Cost Accumulated amortisation Net book amount Period ended 31 July 2010 Opening net book amount Acquisition of business Other additions Transfer between classes Assets written off Amortisation charge2 Closing net book amount At 31 July 2010 Cost Accumulated amortisation Net book amount Period ended 30 July 2011 Opening net book amount Brand names and trade marks 1 $’000 Goodwill $’000 Software $’000 349,534 391,900 151,413 – (1,150) (23,032) 349,534 390,750 128,381 Lease Rights $’000 48,540 (8,343) 40,197 Total $’000 941,387 (32,525) 908,862 349,534 390,750 128,381 40,197 908,862 – – – – – – 120 – – – 29,449 386 – (345) (12,525) 349,534 390,525 145,691 – – – – (4,927) 35,270 – 29,569 386 – (17,797) 921,020 349,534 392,020 181,248 48,540 971,342 – (1,495) (35,557) (13,270) (50,322) 349,534 390,525 145,691 35,270 921,020 349,534 390,525 145,691 35,270 921,020 Acquisition of subsidiary (refer note 31) 27,097 Other additions Transfer between classes Assets written off Amortisation charge2 Closing net book amount At 30 July 2011 Cost Accumulated amortisation Net book amount 23,569 4,613 – – 234 7,961 (17,351) – (351) (16,941) – – – – 376,631 418,356 119,594 – – – – (5,971) 29,299 50,900 12,574 (17,351) – (23,263) 943,880 376,631 420,202 172,092 48,540 1,017,465 – (1,846) (52,498) (19,241) (73,585) 376,631 418,356 119,594 29,299 943,880 1 2 Brand names and trade marks include certain brand names which have indefinite useful lives. The carrying amount at 30 July 2011 of the indefinite lived brands was $413 million (2010: $385 million). Amortisation of $23.3 million (2010: $17.8 million) is included in administration and selling expenses in profit or loss. 11141_MYER_AR11_Financials_PPv1.indd 81 10/10/11 10:57 AM 82 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 15 Non‑current assets – Intangible assets continued (a) Impairment tests for goodwill and intangibles with an indefinite useful life The goodwill arising on the acquisition of the Myer business cannot be allocated to the Group’s individual cash generating units (the Group’s stores), and hence has been allocated to the business as a whole. Similarly, the Myer brand name, which has an indefinite useful life, has been allocated to the business as a whole. The goodwill arising on the acquisition of the sass & bide business cannot be allocated to the individual cash generating units (the sass & bide stores), and hence has been allocated to the sass & bide business as a whole. Similarly, the sass & bide brand name, which has an indefinite useful life, has been allocated to the sass & bide business as a whole. AASB 136 Impairment of Assets requires goodwill and intangible assets with an indefinite useful life to be tested annually for impairment. In testing these assets for impairment, the recoverable amount of the business has been determined using a value in use calculation. This calculation uses cash flow projections based on financial budgets approved by management covering a 5 year period. Cash flows beyond 5 periods are extrapolated using an estimated growth rate of 3%. Key assumptions used in the calculation were as follows: › › › discount rate (pre tax) 16.0% terminal growth rate 3% operating gross profit margin 40% Neither goodwill nor indefinite lived intangibles were impaired at the end of the reporting period. Sensitivity analysis on reasonably possible changes in assumptions did not result in an outcome where an impairment would be required. 16 Current liabilities – Trade and other payables Trade payables Other payables Trade and other payables are non‑interest bearing. 17 Current liabilities – Provisions Employee benefits Workers’ compensation (a) Sales returns (b) Other (a) Workers’ compensation The amount represents a provision for potential workers’ compensation claims in certain states. (b) Sales returns The amount represents a provision for potential sales returns under the Group’s returns policy. Consolidated 2011 $’000 210,975 205,057 416,032 2010 $’000 216,588 220,980 437,568 Consolidated 2011 $’000 63,850 19,228 3,503 4,005 2010 $’000 77,542 17,324 3,446 6,139 90,586 104,451 11141_MYER_AR11_Financials_PPv1.indd 82 10/10/11 10:57 AM 83 (c) Movements in provisions Movements in each class of provision during the financial period, other than employee benefits, are set out below: 2011 consolidated Current Carrying amount at start of period Additional provisions recognised during the period Amounts utilised during the period Carrying amount at end of period 2010 consolidated Current Carrying amount at start of period Additional provisions recognised during the period Amounts utilised during the period Carrying amount at end of period 18 Borrowings Non‑current borrowings Bank loans Total borrowings Workers’ compensation $’000 Sales returns $’000 Other $’000 Total $’000 17,324 6,645 (4,741) 19,228 3,446 3,503 (3,446) 3,503 6,139 7,248 26,909 17,396 (9,382) (17,569) 4,005 26,736 Workers’ compensation $’000 Sales returns $’000 Other $’000 Total $’000 15,153 5,983 (3,812) 17,324 3,285 3,446 (3,285) 3,446 5,912 3,233 (3,006) 6,139 24,350 12,662 (10,103) 26,909 Consolidated 2011 $’000 2010 $’000 419,591 419,591 419,919 419,919 11141_MYER_AR11_Financials_PPv1.indd 83 10/10/11 10:57 AM 84 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 18 Borrowings continued (a) Structure of debt The debt funding of the Group at 30 July 2011 comprised bank loan facilities. The loan facilities comprise the following: › › Term cash advance facility: $425 million; and Revolving cash advance facility: $200 million. These facilities were established on 29 October 2009, drawn down on the 6 November 2009 and have been amended and restated in the current year on 3 June 2011. In addition to the above, the Group entered into a 1 year $50m revolving credit facility on 13 April 2011 for the purpose of funding the acquisition of the sass & bide business. At balance date, the following amounts remain drawn down: Term cash advance facility Revolving cash advance facility Less borrowing costs Net borrowings per balance sheet 2011 $’000 2010 $’000 425,000 425,000 – – 425,000 425,000 (5,409) (5,081) 419,591 419,919 (i) Bank loan facilities The terms and conditions of the Group’s bank loan facilities are as follows: Loan Facilities Syndicated facility Description Amount Term Term cash advance facility – Tranche A Term loan facility $225 million 3 years from 3 June 2011 Term cash advance facility – Tranche B Term loan facility $200 million 4 years from 3 June 2011 Revolving cash advance facility – Tranche C Revolving facility $100 million 3 years from 3 June 2011 Revolving cash advance facility – Tranche D Revolving facility $100 million 4 years from 3 June 2011 Bilateral cash advance facility Revolving cash advance facilities Revolving facility $50 million 1 year from 13 April 2011 The Term cash advance facilities (Tranche A and B) are term loan facilities repayable at maturity on 2 June 2014 and 2 June 2015 respectively. Any amounts repaid on these facilities during the term may not be redrawn. The revolving cash advance facilities (Tranche C, D and bilateral) are revolving, so that amounts repaid may be redrawn during their terms. (b) Security The loan facilities in place at 30 July 2011 are unsecured, subject to various representations, undertakings, events of default and review events which are usual for facilities of this nature. (c) Fair value The carrying amounts and fair values of borrowings at balance date are: Group Bank loans 2011 2010 Carrying amount $’000 Fair value $’000 419,591 419,591 419,591 419,591 Carrying amount $’000 419,919 419,919 Fair value $’000 419,919 419,919 The fair value of existing borrowings equals their carrying amount, as the impact of discounting is not significant. (d) Risk exposures Details of the Group’s exposure to risks arising from current and non‑current borrowings are set out in note 2. 11141_MYER_AR11_Financials_PPv1.indd 84 10/10/11 10:57 AM 19 Non‑current liabilities – Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Property, plant, equipment and software Deferred stamp duty Brand name Derivative financial instruments Sundry items Set off of deferred tax liabilities pursuant to set off provisions (note 14) Net deferred tax liabilities Movements: Balance at beginning of period Charged/(credited) to profit or loss (note 7) Charged/(credited) to other comprehensive income Acquisition of subsidiary (note 31) Balance at end of period 20 Non‑current liabilities – Provisions Employee benefits Fixed lease rental increases Unfavourable lease contracts Other 85 Consolidated 2011 $’000 2010 $’000 10,772 1,309 8,568 16 37 20,702 (20,702) – 9,277 4,607 (232) 7,050 5,091 1,424 1,622 165 975 9,277 (9,277) – 4,958 4,319 – – 20,702 9,277 Consolidated 2011 $’000 4,374 41,935 3,082 – 2010 $’000 4,331 45,841 5,322 5,000 49,391 60,494 (a) Fixed lease rental increases The Group is a party to a number of leases that include fixed rental increases during their term. In accordance with AASB 117 Leases, the total rentals over these leases are being expensed over the lease term on a straight‑line basis. The above provision reflects the difference between the future committed payments under these leases and the total future expense. (b) Unfavourable lease contracts At the date the Myer business was acquired, the business was party to a number of unfavourable lease contracts compared to market rentals payable at the time. As part of the acquisition accounting, a provision was raised for the difference between the rentals committed under these leases and the market value of these leases. 11141_MYER_AR11_Financials_PPv1.indd 85 10/10/11 10:57 AM 86 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 20 Non‑current liabilities – Provisions continued (c) Movements in provisions Movements in each class of provision during the financial period, other than employee benefits, are set out below: 2011 consolidated Carrying amount at start of period Additional amounts recognised Amounts unused and reversed during the period Amounts utilised during the period Carrying amount at end of period 2010 consolidated Carrying amount at start of period Additional amounts recognised Amounts utilised during the period Carrying amount at end of period 21 Non‑current liabilities – Other Financial liability Long term payable Retirement benefit obligations Fixed lease rental increases $’000 Unfavourable lease contracts $’000 Other $’000 Total $’000 45,841 2,391 – (6,297) 41,935 51,257 856 (6,272) 45,841 5,322 – – (2,240) 3,082 7,775 – (2,453) 5,322 5,000 – (5,000) – – 5,000 – – 5,000 56,163 2,391 (5,000) (8,537) 45,017 64,032 856 (8,725) 56,163 Consolidated Notes 2011 $’000 2010 $’000 24(b) (iii) 30,553 22 2,000 459 33,012 – – 855 855 22 Non‑current liabilities – Retirement benefit obligations (a) Superannuation Plan The Group currently contributes to a number of superannuation funds, most of which are defined contribution funds, with one defined benefit fund. The Myer Super Plan is a defined benefit plan in the Mercer Super Trust, whose trustee is Mercer Investment Nominees Limited and is currently administered by Mercer (Australia) Pty Ltd. Myer employees who were members of the Coles Myer Super Plan on 2 June 2006 were transferred to the Myer Super Plan effective 2 June 2006 (defined contribution members) and 1 January 2007 (defined benefit members) as a consequence of the acquisition of the Myer business. On transfer of Myer employees to the new fund, assets representing the employees’ benefit entitlements at the date of transfer were also transferred. The following sets out details in respect of the defined benefit section only. The expense recognised in relation to the defined contribution plans is disclosed in note 6. (b) Balance sheet amounts The amounts recognised in the balance sheet (within other non‑current liabilities) are determined as follows: Present value of the defined benefit obligation Fair value of defined benefit plan assets Unrecognised past service costs Net liability in the balance sheet The Group has no legal obligation to settle this liability with an immediate contribution or additional one off contributions. Consolidated 2011 $’000 5,979 2010 $’000 6,468 (5,520) (5,613) 459 – 459 855 – 855 11141_MYER_AR11_Financials_PPv1.indd 86 10/10/11 10:57 AM (c) Categories of plan assets The main categories of plan assets are as follows: Cash Equity instruments Fixed Income Property (d) Reconciliations Reconciliation of the defined benefit obligation which is partly funded Opening balance Current service cost Interest cost Contributions by plan participants Actuarial (gains) and losses Benefits paid Taxes and premiums paid Balance at end of the period Reconciliation of the fair value of plan assets Opening balance Expected return on plan assets Actuarial gains and (losses) Contributions by Group companies Contributions by plan participants Benefits paid Taxes and premiums paid Balance at end of the period 87 Consolidated 2011 $’000 552 3,422 773 773 5,520 2010 $’000 337 3,985 730 561 5,613 Consolidated 2011 $’000 2010 $’000 6,468 8,495 153 238 60 23 (887) (76) 5,979 5,613 353 206 251 60 (887) (76) 5,520 235 348 66 285 (2,572) (389) 6,468 5,791 346 158 2,213 66 (2,572) (389) 5,613 11141_MYER_AR11_Financials_PPv1.indd 87 10/10/11 10:57 AM 88 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 22 Non‑current liabilities – Retirement benefit obligations continued (e) Amounts recognised in profit or loss The amounts recognised in profit or loss are as follows: Current service cost Interest cost Expected return on plan assets Total included in employee benefits expense Actual return on plan assets (f) Amounts recognised in other comprehensive income The amounts recognised in other comprehensive income were as follows: Actuarial (loss)/gain for the period Cumulative actuarial (losses)/gains recognised in other comprehensive income (g) Principal actuarial assumptions The principal actuarial assumptions used (expressed as weighted averages) were as follows: Discount rate Expected return on plan assets Future salary increases Consolidated 2011 $’000 153 238 (353) 38 559 2010 $’000 235 348 (346) 237 504 Consolidated 2011 $’000 183 (5,252) 2010 $’000 (127) (5,435) Consolidated 2011 $’000 4.10% 7.00% 3.50% 2010 $’000 4.20% 7.00% 3.50% The expected rate of return on plan assets has been based on historical and future expectations of returns for each of the major categories of asset classes as well as the expected and actual allocation of plan assets to these major categories. This resulted in the selection of a 7.0% rate of return net of taxes and fees. (h) Employer contributions Employer contributions to the defined benefit section of the plan are based on recommendations by the plan’s actuary. Actuarial assessments are made at no more than three yearly intervals. However, due to the state of financial markets during the period, the Company commissioned the actuary to provide more regular updates on the fund’s financial position. The objective of funding is to ensure that the benefit entitlements of members and other beneficiaries are fully funded by the time they become payable. To achieve this objective, the actuary has adopted a method of funding benefits known as the aggregate funding method. This funding method seeks to have benefits funded by means of a total contribution which is expected to be a constant percentage of members’ salaries over their working lifetimes. Total employer contributions expected to be paid by Group companies for the period ending 28 July 2012 are $404 thousand. The economic assumptions used by the actuary to make the funding recommendations were a long term investment earning rate of 7.0% pa (net of fees and taxes), a salary increase rate of 3.5% pa and a discount rate of 4.1%. 11141_MYER_AR11_Financials_PPv1.indd 88 10/10/11 10:57 AM (h) Employer contributions continued (i) Historic summary Defined benefit plan obligation Plan assets Deficit Experience adjustments (gain)/loss – plan assets Experience adjustments (gain) – plan liabilities 23 Contributed equity Opening balance Ordinary shares issued under IPO Ordinary shares issued under Myer Notes exchange Ordinary shares issued under employee gift offer 89 2008 $’000 2007 $’000 (39,251) (49,142) 38,525 48,908 (726) 7,183 (5,673) 2011 $’000 – – – 5 – (234) (2,632) 3,408 2010 $’000 84,946 313,189 122,396 5,945 52 652 2011 $’000 (5,979) 5,520 (459) (206) 12 2010 $’000 (6,468) 5,613 (855) (158) 256 2009 $’000 (8,495) 5,791 (2,704) 6,068 (3,208) 2011 Number of shares 2010 Number of shares 581,517,884 457,769,439 553,962 – – – 76,387,581 29,852,728 1,449,888 Options exercised at $0.01 per ordinary share during the period 480,000 5,211,113 Options exercised at $1.27 per ordinary share during the period – 513,333 Shares issued to Employee Share Scheme Trust at market value during the period 1,150,000 10,333,802 3,668 36,750 583,147,884 581,517,884 557,635 563,930 Less: Transaction costs arising on share issue net of tax – – – (9,968) Treasury shares Opening balance 583,147,884 581,517,884 557,635 553,962 (537,016) – (36,834) – Shares issued to Employee Share Scheme Trust (1,150,000) (10,333,802) (3,668) (36,750) Shares allocated on exercise of options at $0.01 during the period 480,000 9,551,905 Shares allocated on exercise of options at $1.27 during the period 208,278 506,881 Shares allocated on exercise of options at $3.00 during the period 692,333 – Shares acquired by Employee Share Scheme Trust – (262,000) 5 264 2,077 – 96 643 – (823) Closing balance of Treasury shares Closing balance (306,405) (537,016) (38,156) (36,834) 582,841,479 580,980,868 519,479 517,128 (a) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands, every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (b) Treasury shares Treasury shares are shares in Myer Holdings Limited that are held by the Myer Equity Plans Trust for the purposes of issuing shares under the Myer Equity Incentive Plan (see note 38 for further information). 11141_MYER_AR11_Financials_PPv1.indd 89 10/10/11 10:57 AM 90 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 23 Contributed equity continued (c) Employee share and option schemes Information relating to the employee share and option schemes, including details of shares issued under the scheme, is set out in note 38. (d) Share issue and exercise of options The Company issued a further 480,000 new ordinary shares during the reporting period at $0.01 per share. In the prior period, the Company was listed on the Australian Securities Exchange (ASX). At this time, the Company held an Initial Public Offer of shares in the Company and 76,387,581 shares were issued. Furthermore, Myer Note holders were given the opportunity to exchange Myer Notes at a 2.5 % discount and as a result a further 29,852,728 shares were issued under the Myer Notes exchange. During the IPO process, eligible employees were offered the opportunity to acquire, at no cost, shares up to the value of $725. Under the gift offer 1,449,888 shares were issued. (e) Capital risk management The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of various balance sheet ratios including the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet plus net debt. The gearing ratios at 30 July 2011 and 31 July 2010 were as follows: Total borrowings Less: Cash and cash equivalents Net debt Total equity Total capital Gearing ratio Notes 18 8 Consolidated 2011 $’000 2010 $’000 419,591 419,919 (37,274) (105,834) 382,317 861,330 314,085 857,440 1,243,647 1,171,525 31% 27% The increase in the gearing ratio during 2011 was primarily driven by the increase in net debt associated with the sass & bide acquisition. 24 Reserves and retained profits (a) Retained profits Movements in retained profits were as follows: Balance at beginning of period Items of other comprehensive income recognised directly in retained earnings: Actuarial (losses)/gains on retirement benefit obligation, net of tax (note 22 (f )) Dividends Net profit/(loss) for the period Balance at end of period Consolidated 2011 $’000 2010 $’000 320,470 314,446 183 (127) (130,981) (61,031) 159,724 67,182 349,396 320,470 11141_MYER_AR11_Financials_PPv1.indd 90 10/10/11 10:57 AM (b) Reserves Share‑based payments (i) Cash flow hedges (ii) Other reserve (iii) Foreign currency translation reserve (iv) Movements: Share-based payments Balance at beginning of period Share‑based payments expense recognised Income tax (notes 7, 14 and 19) Balance at end of period Cash flow hedges Balance at beginning of period Revaluation – gross Deferred tax (notes 14 and 19) Transfer to net profit – gross Deferred tax (notes 14 and 19) Transfer to net profit IPO related – gross Deferred tax (notes 14 and 19) Transfer to inventory and other assets – gross Deferred tax (notes 14 and 19) Balance at end of period Other reserve Balance at beginning of period Other reserve recognised Balance at end of period Foreign currency translation Balance at beginning of period Currency translation differences arising during the period Balance at end of period 91 Consolidated 2011 $’000 19,314 (2,699) (31,650) (85) 2010 $’000 19,754 88 – – (15,120) 19,842 19,754 (1,409) 969 6,890 5,749 7,115 19,314 19,754 88 (26,160) (6,009) 1,041 1,289 (387) – – 1,827 (548) (2,699) – (31,650) (31,650) – (85) (85) 9,753 (2,925) 352 (106) 29,019 (8,706) (1,627) 488 88 – – – – – – (i) Share-based payments The share‑based payments reserve is used to recognise the fair value of options issued to employees but not exercised. (ii) Cash flow hedges The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity, as described in note 1(n). Amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. 11141_MYER_AR11_Financials_PPv1.indd 91 10/10/11 10:57 AM 92 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 24 Reserves and retained profits continued (b) Reserves continued (iii) Other reserve Under the shareholders’ agreement entered into with the non‑controlling shareholders at the time of acquisition, the Group holds a call option over the non‑ controlling shareholders’ 35% interest in Boogie & Boogie Pty Ltd, the owner of sass & bide, and the non‑controlling shareholders have a corresponding put option. These options are exercisable at any time after 2 years from acquisition date at a market value of the shares at that time based on a formula contained within the shareholders’ agreement. The potential liability of the Group under the put option has been estimated at acquisition date based on expectations on the timing of exercise and the exercise price at that future point in time, discounted to present value using the Group’s incremental borrowing rate. The recognition of the put option liability at acquisition date has resulted in the recognition of an amount to the other reserve within shareholders’ equity and a financial liability within non current liabilities other. This liability will be re‑assessed each reporting date for any change in the expected liability on exercise, with the impact recognised within finance costs within the income statement. (iv) Foreign currency translation Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note 1(d) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 25 Dividends (a) Ordinary shares Consolidated 2011 $’000 2010 $’000 Final dividend for the period ended 31 July 2010 of 11.5 cents (2009: nil) per fully paid share paid 4 November 2010 (2009: nil) Fully franked based on tax paid at 30% 66,870 – Interim dividend for the period ended 30 July 2011 of 11.0 cents (2010: 10.5 cents) per fully paid share paid 12 May 2011 (2010: 6 May 2010) Fully franked based on tax paid at 30% Total dividends provided for or paid (b) Dividends not recognised at the end of the reporting period 64,111 130,981 61,031 61,031 In addition to the above dividends, since period end the directors have recommended the payment of a final dividend of 11.5 cents per fully paid ordinary share (2010: 11.5 cents), fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 16 November 2011, but not recognised as a liability at period end, is: 67,027 66,813 (c) Franked dividends The franked portions of the final dividends recommended after 30 July 2011 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the period ending 28 July 2012. Franking credits available for subsequent financial periods based on a tax rate of 30% (2010: 30%) 33,954 73,500 The above amounts represent the balance of the franking account as at the reporting date, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax, (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the directors since the end of the reporting period, but not recognised as a liability at the reporting date, will be a reduction in the franking account of $29 million (2010: reduction of $29 million). 11141_MYER_AR11_Financials_PPv1.indd 92 10/10/11 10:57 AM 93 26 Key Management Personnel disclosures (a) Key Management Personnel compensation Key Management Personnel compensation for the period ended 30 July 2011 is set out below. The Key Management Personnel of the Group are persons having the authority and responsibility for planning, directing and controlling the Company’s activities directly or indirectly, including the Directors of Myer Holdings Limited. Short term employee benefits Post employment benefits Long term benefits Termination and other benefits Share‑based payments Consolidated 2011 $’000 2010 $’000 4,955,262 8,380,113 233,723 266,191 921,901 1,021,362 – 3,212,616 (1,305,329) 3,701,454 4,805,557 16,581,736 Detailed remuneration disclosures are provided in the Remuneration Report on pages 40 to 53. (b) Equity instrument disclosures relating to Key Management Personnel (i) Options provided as remuneration and shares issued on exercise of such options Details of options provided as remuneration and shares issued on the exercise of such options, together with terms and conditions of the options, can be found in the Remuneration Report on pages 40 to 53. (ii) Option holdings The numbers of options over ordinary shares in the Company held during the financial period by each Director of Myer Holdings Limited and other Key Management Personnel of the Group, including their personally related parties, are set out below. 2011 Name Balance at start of the period Granted as compensation Directors of Myer Holdings Limited Howard McDonald Bernard Brookes Tom Flood Rupert Myer Anne Brennan Peter Hay Chris Froggatt 26,667 7,860,394 10,000 – – – – Other Key Management Personnel of the Group Mark Ashby Penny Winn Greg Travers Nick Abboud 1,420,168 1,320,168 478,836 1,016,036 All vested options are exercisable at the end of the period. – – – – – – – – – – – Exercised – (480,000) – – – – – (80,000) – – (30,000) Other changes Balance at end of the period Vested and exercisable Unvested – – – – – – – – – – – 26,667 7,380,394 10,000 – – – – – – – – – – – 26,667 7,380,394 10,000 – – – – 1,340,168 253,333 1,086,835 1,320,168 166,667 1,153,501 478,836 986,036 – – 478,836 986,036 11141_MYER_AR11_Financials_PPv1.indd 93 10/10/11 10:57 AM 94 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 26 Key Management Personnel disclosures continued (b) Equity instrument disclosures relating to Key Management Personnel continued 2010 Name Balance at start of the period Granted as compensation Exercised Other changes Balance at end of the period Vested and exercisable Unvested – – – 26,667 7,860,394 10,000 Directors of Myer Holdings Limited Howard McDonald 400,000 – (373,333) Bernard Brookes 5,600,000 7,380,394 (5,120,000) Tom Flood William Wavish Rupert Myer Anne Brennan Peter Hay 150,000 5,600,000 – – – – – – – – Other Key Management Personnel of the Group Mark Ashby Penny Winn Greg Travers Nick Abboud 1,000,000 900,000 684,446 658,444 420,168 420,168 420,168 420,168 (140,000) – – – – – – (625,778) (62,576) (5,600,000) – – – – – – – – – – ‑ – – – 26,667 7,860,394 10,000 ‑ ‑ ‑ 1,420,168 333,333 1,086,835 1,320,168 166,667 1,153,501 478,836 – 1,016,036 30,000 478,836 986,036 William Wavish has been included as a Director for the start of 2010 but due to his resignation as a Director on 4 August 2009 his option holdings have been removed in ‘Other changes’. (iii) Share holdings The number of shares in the Company held during the financial period by each Director of Myer Holdings Limited and other Key Management Personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 2011 Name Directors of Myer Holdings Limited Ordinary shares Howard McDonald Bernard Brookes Tom Flood Rupert Myer Anne Brennan Peter Hay Chris Froggatt Other Key Management Personnel of the Group Ordinary shares Mark Ashby Penny Winn Greg Travers Nick Abboud Received during the period on the exercise of options Balance at the start of the period Other changes during the period Balance at the end of the period 2,047,723 – 11,066,630 480,000 390,000 725,710 53,658 12,195 – 185,257 200,000 2,017,140 – – – – – – 10,040 2,047,723 11,546,630 390,000 725,710 53,658 12,195 10,040 245,257 200,000 80,000 (20,000) – 288,132 30,000 (318,132) – (480,000) 1,537,140 – – – – – – – – – – – 11141_MYER_AR11_Financials_PPv1.indd 94 10/10/11 10:57 AM 95 (b) Equity instrument disclosures relating to Key Management Personnel continued 2010 Name Directors of Myer Holdings Limited Ordinary shares Howard McDonald Bernard Brookes Tom Flood William Wavish Rupert Myer Anne Brennan Peter Hay Other Key Management Personnel of the Group Ordinary shares Mark Ashby Penny Winn Greg Travers Nick Abboud Received during the period on the exercise of options Balance at the start of the period Other changes during the period Balance at the end of the period 1,650,000 373,333 24,390 2,047,723 6,650,000 5,120,000 (703,370) 11,066,630 250,000 140,000 – 390,000 6,650,000 – – – 220,000 200,000 – – – – – – (6,650,000) – 725,710 725,710 53,658 12,195 53,658 12,195 (34,743) – 185,257 200,000 1,615,554 625,778 (224,192) 2,017,140 391,556 62,576 (166,000) 288,132 William Wavish has been included as a Director for the start of 2010 but due to his resignation as a Director on 4 August 2009 his share holdings have been removed in ‘Other changes during the period’. (c) Loans to Key Management Personnel Details of loans made to directors of Myer Holdings Limited and other Key Management Personnel of the Group, including their personally related parties, are set out below. (i) Aggregates for Key Management Personnel Group 2011 2010 Balance at the start of the period $ – 46,197 Interest paid and payable for the period $ – 406 Interest not charged $ Balance at the end of the period $ Number in Group at the end of the period – – – – – 1 (ii) Individuals with loans above $100,000 during the financial period In 2010 and 2011 there were no loans to individuals that exceeded $100,000 at any time. (d) Other transactions with Key Management Personnel There were no transactions with Key Management Personnel or entities related to them, other than compensation. 11141_MYER_AR11_Financials_PPv1.indd 95 10/10/11 10:57 AM 96 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 27 Remuneration of auditors During the period the following fees were paid or payable for services provided by the auditor of the Group, and its related practices: (a) PwC Australia (i) Assurance services Audit services Audit and review of financial statements and other audit work under the Corporations Act 2001 334,460 285,800 Consolidated 2011 52 weeks $ 2010 53 weeks $ Other assurance services Audit of rent certificates Other Total remuneration for other assurance services Total remuneration for assurance services (ii) Taxation services Tax consulting and tax advice (iii) Initial Public Offering services Initial Public Offering related services (iv) Other services Other services Total remuneration of PwC Australia (b) Overseas practices of PwC (i) Other services Other services Total remuneration for overseas practices of PwC (c) Other firms (i) Assurance services Audit services Audit and review of financial statements and other audit work under the Corporations Act 2001 Other assurance services Audit of rent certificates Other Total remuneration for other assurance services Total remuneration for assurance services (ii) Taxation services Tax consulting and tax advice Total remuneration of other firms 34,100 29,026 63,126 397,586 43,500 105,570 149,070 434,870 284,748 248,516 – 1,966,156 51,729 – 734,063 2,649,542 60,593 60,593 69,500 3,000 4,231 7,231 76,731 19,000 95,731 – – – – – – – – – 11141_MYER_AR11_Financials_PPv1.indd 96 10/10/11 10:57 AM 97 28 Contingencies Contingent liabilities The Group had contingent liabilities at 30 July 2011 in respect of: Guarantees For information about guarantees given by entities within the Group, including the parent entity, please refer to notes 33 and 36. While the amount and timing of any contingencies are uncertain, no material losses are anticipated in respect of the above contingent liabilities. 29 Commitments (a) Capital commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows: Property, plant, equipment and software Payable: Within one year Later than one year but not later than five years Later than five years Consolidated 2011 $’000 2010 $’000 13,613 28,223 – – – – 13,613 28,223 (b) Lease commitments: Group as lessee Operating leases The Group leases the majority of its stores and warehouses under non‑cancellable operating leases expiring within 1 to 26 years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non‑cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years Consolidated 2011 $’000 2010 $’000 195,403 668,759 190,054 675,034 1,586,957 1,505,950 2,451,119 2,371,038 Not included in the above commitments are contingent rental payments that may arise in the event that sales made by certain leased stores exceed a pre‑ determined amount. The contingent rentals payable as percentage of sales revenue and the relevant thresholds vary from lease to lease. 30 Related party transactions (a) Parent entities The parent entity within the Group is Myer Holdings Limited, a listed public company, incorporated in Australia. (b) Subsidiaries Interests in subsidiaries are set out in note 32. (c) Key Management Personnel Disclosures relating to Key Management Personnel are set out in note 26. (d) Transactions with other related parties During the prior period the Group incurred a management fee of $63,000 with Newbridge Capital LLC, an entity associated with the Group’s previous ultimate parent entity for services provided to the Group. There were no transactions with other related parties during the current period. 11141_MYER_AR11_Financials_PPv1.indd 97 10/10/11 10:57 AM 98 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 31 Business combination (a) Summary of acquisition On 2 March 2011 the parent entity acquired 65% of the issued share capital of Boogie & Boogie Pty Ltd, the owner of sass & bide. sass & bide is one of Australia’s most respected and successful women’s fashion brands. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration (refer to (b) below): Cash paid Contingent consideration Total purchase consideration The assets and liabilities recognised as a result of the acquisition are as follows: Cash Trade receivables Inventories Property, plant and equipment Deferred tax asset Intangible assets Other assets Trade and other payables Provisions Deferred tax liability Other liabilities Net identifiable assets acquired Less: non‑controlling interests Add: goodwill Net assets acquired $’000 41,274 – 41,274 Fair Value $’000 900 1,382 3,869 4,219 832 23,803 267 (2,141) (483) (7,050) (3,787) 21,811 (7,634) 27,097 41,274 The goodwill acquired is attributable to the workforce acquired and the potential to increase the profitability of the acquired business. It will not be deductible for tax purposes. There were no acquisitions in the year ending 31 July 2010. (i) Contingent consideration In the event that certain pre‑determined performance hurdles were achieved by the subsidiary, there was an allowance in the terms of the transaction for the vendors to be paid an earn‑out on performance for the year ended 30 July 2011. However, based on the performance of the subsidiary there will be no amount payable under the earn‑out and therefore we have not recorded a liability for this item. (ii) Non-controlling interests In accordance with the accounting policy set out in note 1(h), the Group elected to recognise the non‑controlling interests in Boogie and Boogie Pty Ltd at its proportionate share of the acquired net identifiable assets. (iii) Revenue and profit contribution The acquired business contributed revenues of $14.1m and net loss of $0.2m to the Group for the period from 2 March 2011 to 30 July 2011. If the acquisition had occurred on 1 August 2010, consolidated revenue and profit for the year ended 30 July 2011 would have been $38.0m and $3.2m respectively. These amounts have been calculated using the Group’s accounting policies. 11141_MYER_AR11_Financials_PPv1.indd 98 10/10/11 10:57 AM (b) Purchase consideration – cash outflow Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration Less balances acquired: Cash Outflow of cash – investing activities 99 2011 $’000 41,274 900 40,374 2010 $’000 – – – Acquisition related costs Acquisition related costs of $0.7m are included in administration expenses in profit or loss and in operating cash flows in the statement of cash flows. 32 Subsidiaries and transactions with non‑controlling interests (a) Investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(b): Name of entity NB Elizabeth Pty Ltd1, 3 NB Russell Pty Ltd2, 3 NB Lonsdale Pty Ltd2, 3 NB Collins Pty Ltd1, 3 Warehouse Solutions Pty Ltd2, 3 Myer Group Pty Ltd1, 3 Myer Pty Ltd1, 3 Myer Group Finance Limited1, 3 The Myer Emporium Pty Ltd1, 3 ACT Employment Services Pty Ltd2 Myer Employee Share Plan Pty Ltd2 Myer Travel Pty Ltd2 Myer Sourcing Asia Ltd Shanghai Myer Service Company Ltd Boogie & Boogie Pty Ltd sass & bide Pty Ltd2 sass & bide Retail Pty Ltd2 sass & bide Retail (NZ) Pty Ltd sass & bide UK Limited sass & bide USA inc. sass & bide inc. Notes: Country of incorporation Class of shares Equity holdings 4 2011 % Equity holdings 4 2010 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Hong Kong China Australia Australia Australia Australia United Kingdom USA USA Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 65 65 65 65 65 65 65 100 100 100 100 100 100 100 100 100 100 100 100 0 0 0 0 0 0 0 0 0 1 2 3 4 Each of these entities has been granted relief from the necessity to prepare financial statements in accordance with Class Order 98/1418 issued by ASIC. Each of these entities is classified as small proprietary and therefore relieved from the requirement to prepare and lodge financial reports with ASIC. Each of these entities is party to a deed of cross guarantee, refer note 33. The proportion of ownership interest is equal to the proportion of voting power held. (b) Transactions with non-controlling interests There were no transactions with non‑controlling interests in 2010 or 2011. 11141_MYER_AR11_Financials_PPv1.indd 99 10/10/11 10:57 AM 100 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 33 Deed of cross guarantee Myer Holdings Limited, NB Elizabeth Pty Ltd, NB Collins Pty Ltd, NB Russell Pty Ltd, Myer Group Pty Ltd, NB Lonsdale Pty Ltd, Warehouse Solutions Pty Ltd, Myer Group Finance Limited, Myer Pty Ltd and The Myer Emporium Pty Ltd are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly‑owned entities have been relieved from the requirement to prepare a financial report and directors’ report under Class Order 98/1418 (as amended) issued by ASIC. Each of the members of the extended ‘closed group’ are considered to be solvent at 30 July 2011. (a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained earnings The above companies represent a ‘closed group’ for the purposes of the Class Order, and as there are no other parties to the deed of cross guarantee that are controlled by Myer Holdings Limited, they also represent the ‘extended closed group’. As certain group entities are not members of the closed group, additional disclosure has been made in relation to the closed group. Set out below is a consolidated income statement, a consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for the year ended 30 July 2011 of the closed group. Income statement Total sales value (excluding GST) Concession Sales Sale of goods (excluding GST) Sales revenue deferred under customer loyalty program Revenue from sale of goods (excluding GST) Other operating revenue (excluding finance revenue) Cost of goods sold Other income Operating gross profit Selling expenses Administration expenses Store closure and Restructuring costs Profit on sale of financial asset Earnings before interest and tax before non-recurring Initial Public Offering (IPO) transaction costs and related charges Finance revenue Finance costs Net finance costs Profit before income tax before non-recurring IPO transaction costs and related charges Income tax expense Profit for the period before non‑recurring IPO transaction costs and related charges IPO transaction costs and other non‑recurring IPO related charges (after tax) Profit for the period 2011 52 weeks $’000 2010 53 weeks $’000 3,145,346 3,324,240 (452,000) (449,950) 2,693,346 2,874,290 (40,104) (49,256) 2,653,242 2,825,034 109,559 103,822 (1,545,733) (1,672,073) 45,904 60,580 1,262,972 1,317,363 (713,060) (729,956) (290,101) (317,518) (10,476) 11,680 – – 261,015 269,889 2,139 (37,646) (35,507) 2,709 (44,570) (41,861) 225,508 228,028 (61,465) (64,819) 164,043 163,209 (3,522) (96,352) 160,521 66,857 11141_MYER_AR11_Financials_PPv1.indd 100 10/10/11 10:57 AM 101 (a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained earnings continued Statement of comprehensive income Profit for the period Other comprehensive income Cash flow hedges Non‑recurring IPO related transfers to profit and loss Actuarial gains/(losses) on retirement benefit obligation Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income for the period Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit for the period Actuarial gains/(losses) on retirement benefit obligation Dividends provided for or paid Retained earnings at the end of the financial year 2011 52 weeks $’000 2010 53 weeks $’000 160,521 66,857 (2,665) – 183 – 38 (2,444) 158,077 8,478 29,019 (127) – (11,249) 26,121 92,978 2011 52 weeks $’000 2010 53 weeks $’000 320,167 314,468 160,521 66,857 183 (127) (130,981) (61,031) 349,890 320,167 11141_MYER_AR11_Financials_PPv1.indd 101 10/10/11 10:57 AM 102 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 33 Deed of cross guarantee continued (b) Consolidated balance sheet Set out below is a consolidated balance sheet as at 30 July 2011 of the closed group. ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Total current assets Non-current assets Other financial assets Derivative financial instruments Property, plant and equipment Deferred tax assets Intangible assets Other Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Provisions Other Total current liabilities Non-current liabilities Borrowings Provisions Deferred income Other Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Retained profits/(losses) Reserves Total equity 2011 $’000 2010 $’000 36,149 26,455 376,406 439,010 41,368 258 105,214 23,954 352,813 481,981 6,004 549 530,476 468,050 53,635 70,837 891,972 921,020 4,420 4,763 1,522,129 1,471,223 1,961,139 1,953,204 409,913 437,260 7,247 32,899 89,954 3,078 1,208 9,446 104,451 4,741 543,091 557,106 419,591 419,919 49,153 62,448 33,012 60,494 57,792 855 564,204 539,060 1,107,295 1,096,166 853,844 857,038 519,379 349,890 (15,425) 517,028 320,167 19,843 853,844 857,038 11141_MYER_AR11_Financials_PPv1.indd 102 10/10/11 10:57 AM 103 34 Events occurring after the reporting period Subsequent to 30 July 2011, the Directors have determined to pay a final dividend of 11.5 cents per share, franked to 100% at the 30% corporate income tax rate, payable on 16 November 2011. The record date for this dividend is 30 September 2011. The financial effect of the final ordinary dividend for 2011 has not been recognised in the annual financial statements for the period ended 30 July 2011 and will be recognised in subsequent financial statements. 35 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the period Depreciation and amortisation including lease inducements Interest income Fair value adjustment to derivatives Interest expense – unwind of borrowing costs IPO and related expenses Share based payments expense Profit on sale of financial asset Defined benefits superannuation Change in operating assets and liabilities Decrease (increase) in trade and other receivables Decrease (increase) in inventories Decrease (increase) in deferred tax asset Increase (decrease) in trade and other payables (Decrease) increase in current tax payable (Decrease) increase in provisions (Decrease) increase in other liabilities Net cash (outflow) inflow from operating activities Consolidated 2011 52 weeks $’000 159,665 79,443 (2,169) 2,628 2,173 5,031 (1,410) (11,680) (319) 1,582 (24,008) 18,314 6,497 22,802 2010 53 weeks $’000 67,182 62,705 (2,725) 79 1,694 134,880 5,750 – (67) 6,703 1,131 20,501 (38,943) 2,493 (27,278) (18,310) (4,220) (2,022) 227,051 241,051 11141_MYER_AR11_Financials_PPv1.indd 103 10/10/11 10:57 AM 104 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 36 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital Reserves Cash flow hedges Other reserve Share‑based payments Retained earnings Profit for the period Total comprehensive income (b) Guarantees entered into by the parent entity Carrying amount included in current liabilities 2011 $’000 2010 $’000 45,621 188,411 948,567 1,054,934 56,912 34,588 507,056 454,507 519,479 517,128 258 (31,650) 11,230 (57,806) 2,900 2,774 2011 $’000 – 384 – 12,640 70,275 128,078 128,462 2010 $’000 – The parent entity is the borrowing entity under the Group’s financing facilities. Under these facilities, the parent entity is party to a cross‑guarantee with various other Group entities, who guarantee the repayment of the facilities in the event that the parent entity is in default. The parent entity is also party to a deed of cross guarantee entered into on 10 May 2010. The details of the deed of cross guarantee are set out in Note 33. At balance date, no liability has been recognised in relation to these guarantees on the basis that the potential exposure is not considered material. The parent entity has issued bank guarantees amounting to $31.4 million, of which $23.8 million represents guarantees supporting workers’ compensation self insurance licences in various jurisdictions. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 July 2011 or 31 July 2010. For information about guarantees given by the parent entity, please see above. (d) Contractual commitments for the acquisition of property, plant or equipment The parent entity did not have any contractual commitments for the acquisition of property, plant or equipment as at 30 July 2011 or 31 July 2010. (e) Event subsequent to balance date Subsequent to the end of the financial year, on 14 September 2011 the Company received a dividend from a subsidiary company of $264.2 million, representing payment of undistributed profits of subsidiaries of the current and prior financial year. 11141_MYER_AR11_Financials_PPv1.indd 104 10/10/11 10:57 AM 37 Earnings per share (a) Basic earnings per share 105 Consolidated 2011 $’000 2010 $’000 Total basic earnings per share attributable to the ordinary equity holders of the Company 27.4 12.3 (b) Diluted earnings per share Total diluted earnings per share attributable to the ordinary equity holders of the Company 27.3 12.1 (c) Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share 159,724 67,182 Diluted earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share 159,724 67,182 (d) Weighted average number of shares used as the denominator Consolidated 2011 Number 2010 Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 582,174,903 548,286,696 Adjustments for calculation of diluted earnings per share: Options 3,778,086 7,644,061 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 585,952,989 555,930,757 (e) Information concerning the classification of securities (i) Options Options granted to employees under the Myer Equity Incentive Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 38. 10,573,672 options outstanding at period end are not included in the calculation of diluted earnings per share because they are antidilutive for the period ended 30 July 2011. These options could potentially dilute basic earnings per share in the future. 11141_MYER_AR11_Financials_PPv1.indd 105 10/10/11 10:57 AM 106 M y e r H o l d i n g s liMi t e d Annual Report 2011 Notes to the financial statements continued 38 Share‑based payments (a) Employee Option Plan The Myer Equity Incentive Plan was established to help ensure retention of senior management and key staff and to provide incentives for the delivery of both short and long term shareholder returns. Under the plan, options have been issued in Myer Holdings Limited, the Group’s ultimate Australian parent, under six tranches since November 2006 as follows: Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Issued November to December 2006. Options were granted with time‑based and performance‑based components. Two‑thirds of the options granted were to vest evenly over a 5 year period provided the participant remained with the Group, with the other third vesting upon the achievement of certain EBITDA targets. Under the terms of the offer, as a result of the IPO, 80% of unvested options vested immediately on 6 November 2009, with the remainder vesting on the second anniversary of IPO with the exception of the CEO, whose remaining options under the tranche vested on the first anniversary of the IPO. Issued August 2007. Options were granted with time‑based and performance‑based components. Two‑thirds of the options granted were to vest evenly over a 4 year period provided the participant remained with the Group, with the other third vesting upon the achievement of certain EBITDA targets. Under the terms of the offer, as a result of the IPO, 80% of unvested options vested immediately on 6 November 2009, with the remainder vesting on the second anniversary of IPO. Issued January to July 2008. Options vest on a time basis evenly over the three year period from 31 July 2010 to 31 July 2012. Issued 17 December 2008. Options vest on a time basis over the three year period from 31 July 2011 to 31 July 2013. Issued 30 June 2009. Options vest on a time basis over the three year period from 31 July 2012 to 31 July 2014. Tranche 6: EPS Mgt Plan Issued 6 November 2009. Options vest on an EPS performance basis over a three year period from November 2009 to 31 July 2012, subject to performance hurdles being met. Tranche 6: EPS CEO Plan Issued 6 November 2009. Options vest on an EPS performance basis over a four year period from November 2009 to 31 July 2013, subject to performance hurdles being met. Tranche 6: Share price CEO Plan Issued 6 November 2009. Options vest on a share price performance basis over the four year period from November 2009 to 31 July 2013, the timing of which is subject to performance hurdles being met. Options are granted under the plan for no consideration, and carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share in the Company. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. 11141_MYER_AR11_Financials_PPv1.indd 106 10/10/11 10:57 AM 107 Set out below is a summary of options granted under the plan: Exercise price ($) Balance at start of period (number) Granted during the period (number) Exercised during the period (number) Lapsed during the period (number) Balance at end of period (number) Vested and exercisable at end of the period (number) Grant date Expiry date Consolidated – 2011 Tranche 1: Nov to Dec 2006 15 Oct 2011 $0.01 1,287,475 Tranche 2: Aug to Nov 2007 15 Oct 2011 $1.27 365,341 Tranche 3: Jan to May 2008 21 Dec 2012 $3.00 9,028,213 Tranche 4: 17 Dec 2008 24 Oct 2013 $2.14 4,302,863 Tranche 5: 30 Jun 2009 24 Oct 2014 $2.34 4,702,900 Tranche 6: EPS Mgt Plan 06 Nov 2009 19 Dec 2012 $4.10 3,445,379 Tranche 6: EPS CEO Plan 06 Nov 2009 19 Dec 2013 $4.10 5,152,671 Tranche 6: Share Price CEO Plan 06 Nov 2009 19 Dec 2013 $5.74 2,227,723 Total Weighted average exercise price 30,512,565 $3.14 – – – – – – – – – – (960,000) (10,666) 316,809 – (208,278) – 157,063 66,725 (692,333) (895,300) 7,440,580 2,118,638 – – – – – (597,000) 3,705,863 (549,000) 4,153,900 (252,101) 3,193,278 – – 5,152,671 2,227,723 – – – – – (1,860,611) (2,304,067) 26,347,887 2,185,363 $1.26 $2.73 $3.31 $2.95 11141_MYER_AR11_Financials_PPv1.indd 107 10/10/11 10:57 AM 108 My er Holdings Annual Report 2011 l i M i ted Notes to the financial statements continued 38 Share‑based payments continued (a) Employee Option Plan continued Grant date Expiry date Consolidated – 2010 Tranche 1: Exercise price ($) Balance at start of period (number) Granted during the period (number) Exercised during the period (number) Lapsed during the period (number) Balance at end of period (number) Vested and exercisable at end of the period (number) Nov to Dec 2006 15 Oct 2011 $0.01 16,056,005 Tranche 2: Aug to Nov 2007 15 Oct 2011 $1.27 1,476,110 Tranche 3: Jan to May 2008 21 Dec 2012 $3.00 9,939,013 Tranche 4: 17 Dec 2008 24 Oct 2013 $2.14 4,880,863 Tranche 5: 30 Jun 2009 24 Oct 2014 $2.34 5,055,900 – – – – – Tranche 6: EPS Mgt Plan 06 Nov 2009 19 Dec 2012 $4.10 Tranche 6: EPS CEO Plan 06 Nov 2009 19 Dec 2013 $4.10 Tranche 6: Share Price CEO Plan 06 Nov 2009 19 Dec 2013 $5.74 Total Weighted average exercise price – – – 3,445,379 5,152,671 2,227,723 (14,703,018) (65,512) 1,287,475 – (1,080,214) (30,555) 365,341 275,003 – – – – – – (910,800) 9,028,213 3,009,404 (578,000) 4,302,863 (353,000) 4,702,900 – – – 3,445,379 5,152,671 2,227,723 – – – – – 37,407,891 10,825,773 (15,783,232) (1,937,867) 30,512,565 3,284,407 $1.45 $4.44 $0.10 $2.49 $3.14 $2.86 No options expired during the periods covered by the above table. The weighted average share price at the date of exercise of options exercised during the period ended 30 July 2011 was $3.60 (2010: $3.47). The weighted average remaining contractual life of share options outstanding at the end of the period was 2.1 years (2010: 3.0 years). Fair value of options granted There were no new options granted during the current period. As shares in the Company were not listed, the fair value per share at grant date for Tranches 1 to 5 was based on an externally prepared share valuation, prepared as at the grant date. The fair value per share for Tranche 6 was based on market prices as at the grant date. The expected price volatility is based on estimates of price volatility of comparable listed companies. Expected dividend yield is based on expectations of dividend yield of the Company during the term of the options based on expected returns and dividend policy this period, combined with analysis of dividend yields of comparable listed companies. Where options are issued to employees of subsidiaries within the Group, the subsidiaries compensate the Company for the amount recognised as expense in relation to these options. 11141_MYER_AR11_Financials_PPv1.indd 108 10/10/11 10:57 AM 109 (b) Employee share acquisition plan – employee gift offer The Employee Share Acquisition Plan (ESAP) is designed as a broadly based plan to permit employees of the Myer Group to participate, at the invitation of the Board, in the acquisition of shares on terms and conditions determined by the Board. The initial offer under the ESAP, being the Employee gift offer, issued shares on 6 November 2009 to eligible employees for no cash consideration. Eligible employees are permanent full‑time and permanent part‑time employees of the Myer Group who do not already participate in the Myer Employee Incentive Program (and are not eligible to participate in the MEIP) and were employed at 5.00pm on 2 October 2009 (and remained employed at 5 November 2009). Under the scheme, eligible employees who accepted the offer were granted 176 shares at a value of $721.60, at no cost. Shares issued under the ESAP are subject to a disposal restriction such that the participant cannot deal (i.e. sell or transfer) in the shares for a minimum period of three years (or earlier if their employment ceases). Number of shares issued under the plan to participating employees on 6 November 2009 Consolidated 2011 2010 – 1,449,888 (c) Expenses arising from share-based payment transactions Total expenses arising from share‑based payments transactions recognised during the period as part of employee benefit expense were as follows: Options issued under employee option plan Shares issued under employee share acquisition plan – employee gift offer The expenses arising from the shares issued under the employee share acquisition plan were recognised within IPO costs. Consolidated 2011 $’000 (1,409) – (1,409) 2010 $’000 5,749 5,945 11,694 11141_MYER_AR11_Financials_PPv1.indd 109 10/10/11 10:57 AM 110 M y e r H o l d i n g s liMi t e d Annual Report 2011 Directors’ declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 54 to 109 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 July 2011 and of its performance for the financial period ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in note 33 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 33. Note 1 (a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Howard McDonald Chairman Melbourne, 5 October 2011 11141_MYER_AR11_Financials_PPv1.indd 110 10/10/11 10:57 AM 111 Independent auditor’s report to the members of Myer Holdings Limited Report on the financial report We have audited the accompanying financial report of Myer Holdings Limited (the company), which comprises the balance sheet as at 30 July 2011, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for Myer Holdings Limited and the Myer Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 11141_MYER_AR11_Financials_PPv1.indd 111 10/10/11 10:57 AM 112 M y e r H o l d i n g s liMi t e d Annual Report 2011 Independent auditor’s report to the members of Myer Holdings Limited continued Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of Myer Holdings Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 July 2011 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the remuneration report included in the directors’ report for the year ended 30 July 2011. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Myer Holdings Limited for the year ended 30 July 2011, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Andrew Mill Partner Melbourne 5 October 2011 11141_MYER_AR11_Financials_PPv1.indd 112 10/10/11 10:57 AM 113 Auditor’s Independence Declaration As lead auditor for the audit of Myer Holdings Limited for the year ended 30 July 2011, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Myer Holdings Limited and the entities it controlled during the period. Andrew Mill Partner PricewaterhouseCoopers Melbourne 5 October 2011 PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 11141_MYER_AR11_Financials_PPv1.indd 113 10/10/11 10:57 AM 114 M Y E R H O L D I N G S L I M I T E D Annual Report 2011 Shareholder Information Shareholder information as at 5 October 2011 Myer only has one class of shares on issue (being ordinary shares). All of Myer’s issued shares are listed on the Australian Securities Exchange. Issued capital Number of shareholders Minimum parcel price Number 583,284,551 56,067 $2.07 per unit Holders with less than a marketable parcel (less than 242 shares) 8,433 holders (1,455,779 total shares) Distribution of shareholders and shareholdings Total holders Units % of issued capital Range 1 ‑ 1,000 1,001 ‑ 5,000 5,001 ‑ 10,000 10,001 ‑ 100,000 100,001 and over Total 28,255 21,317 3,561 2,775 159 56,067 Unmarketable Parcels Minimum $ 500.00 parcel at $ 2.07 per unit 242 Minimum parcel size 13,681,521 48,299,930 26,705,586 64,301,100 430,296,414 583,284,551 Holders 8,433 2.35 8.28 4.58 11.02 73.77 100.00 Units 1,455,779 11141_MYER_AR11_Financials_PPv1.indd 114 10/10/11 10:57 AM Twenty largest shareholders Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Citicorp Nominees Pty LimitedCogent Nominees Pty Limited M F Custodians Ltd Bernard Joseph Brookes JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited – A/C 2 Queensland Investment Corporation CS Fourth Nominees Pty Ltd Australian Reward Investment Alliance HSBC Custody Nominees (Australia) Limited – GSCO ECA UBS Nominees Pty Ltd AMP Life Limited UBS Wealth Management Australia Nominees Pty Ltd Brookes Family Investments Pty Ltd Mr John Hawker Bond Street Custodians Limited Total Top 20 shareholders of fully paid ordinary shares Total Remaining holders balance 115 % issued capital Units 115,725,634 98,932,150 53,298,296 34,143,305 16,403,303 15,811,308 11,848,636 8,300,000 6,530,920 6,400,921 4,717,800 2,953,488 2,595,900 2,255,294 2,109,067 2,101,704 1,689,300 1,500,000 1,499,678 1,415,943 19.84 16.96 9.14 5.85 2.81 2.71 2.03 1.42 1.12 1.10 0.81 0.51 0.45 0.39 0.36 0.36 0.29 0.26 0.26 0.24 390,232,647 193,051,904 66.90 33.10 11141_MYER_AR11_Financials_PPv1.indd 115 10/10/11 10:57 AM Shareholder information continued Substantial shareholder As at 5 October 2011, there are two substantial shareholders that Myer is aware of: Name BT Investment Management Commonwealth Bank of Australia Voting Rights Date of most recent notice Relevant interest 9 August 2011 5 October 2011 50,741,617 29,789,827 Shareholders may vote at a meeting of shareholders in person, directly or by proxy, attorney or representative, depending on whether the shareholder is an individual or a company. Subject to any rights or restrictions attaching to shares, on a show of hands each shareholder present in person or by proxy, attorney or representative has one vote and, on a poll, has one vote for each fully paid share held. Presently, Myer has only one class of fully paid ordinary shares and these do not have any voting restrictions. If shares are not fully paid, on a poll the number of votes attaching to the shares is pro‑rated accordingly. Options do not carry any voting rights. 11141_MYER_AR11_Financials_PPv1.indd 116 10/10/11 10:57 AM M Y E R H O L D I N G S L I M I T E D Annual Report 2011 Contents About Myer Highlights From the Chairman From the CEO Review of Operations Sustainability Board of Directors Management Team Corporate Governance Statement Directors’ Report Remuneration Report Financial Report Auditor’s Report Shareholder Information Corporate Directory Myer Holdings Limited ABN 14 119 085 602 105090 Cover CS5 R1.indd 4,6 Annual General Meeting The 2011 Annual General Meeting of Myer Holdings Limited will be held at Mural Hall, Level 6, Myer Melbourne, Bourke Street Mall, Melbourne, Victoria on Friday, 25 November 2011 at 11am. 02 04 06 08 10 20 24 26 28 35 40 54 111 114 Inside Back Cover Corporate Directory Myer Customer Service Centre PO Box 869J Melbourne VIC 3001 Phone: 1800 811 611 (within Australia) or +61 3 8667 6000 (outside Australia) Fax: +61 (0) 3 8667 6091 Auditor PricewaterhouseCoopers Level 19, Freshwater Place 2 Southbank Boulevard Southbank VIC 3006 Securities Exchange Listing Myer Holdings Limited (MYR) shares are listed on the Australian Securities Exchange (ASX). Website www.myer.com.au About this Annual Report The Myer Holdings Limited Annual Report is available online at www.myer.com.au/investor. Hard copies can be obtained by contacting our share registry. Annual General Meeting The 2011 Annual General Meeting of Myer Holdings Limited will be held at Mural Hall, Level 6, Myer Melbourne, Bourke St Mall, Melbourne, Victoria on Friday, 25 November 2011 at 11am. Registered Office details Myer Holdings Limited Level 7 800 Collins Street Docklands VIC 3008 Phone: +61 (0) 3 8667 6000 Myer Support Office 800 Collins Street Docklands VIC 3008 Phone: +61 (0) 3 8667 6800 Myer Postal Address Myer Holdings Limited PO Box 869J Melbourne VIC 3001 Company Secretary Marion Rodwell General Counsel and Company Secretary Shareholder Enquiries: Share Registry Computershare Investor Services Pty Ltd Postal address GPO Box 2975EE Melbourne VIC 3000 Myer Shareholder Information Line 1300 820 260 (within Australia) +61 3 9415 4332 (outside Australia) www.investorcentre.com Investor Relations Davina Gunn Investor Relations Manager Phone: +61 (0) 3 8667 7879 Mobile: +61 (0) 400 896 809 Email: myer.investor.relations@myer.com.au Media Relations Jo Lynch General Manager Corporate Affairs Phone: +61 (0) 3 8667 7571 Mobile: +61 (0) 438 101 793 Email: myer.corporate.affairs@myer.com.au C R E A T E D B Y D E S I G N A T E 13/10/11 2:40 PM A n n u a l R e p o r t 2 0 1 1 M y e r Annual Report 2011 Strong Foundations Annual Report 2011 i l H o d n g s L m i t e d i A B N 1 4 1 1 9 0 8 5 6 0 2 105090 Cover CS5 R1.indd 1-3 13/10/11 2:40 PM