Myer Holdings Ltd
Annual Report 2017

Plain-text annual report

A N N U A L R E P O R T 2 0 1 7 CONTENTS 2 4 6 25 37 38 58 Chairman and CEO Report Performance Review Company Snapshot Directors’ Report Auditor’s Independence Declaration Remuneration Report Financial Statements 108 Independent Auditor’s Report 115 117 Shareholder Information Corporate Directory The 2017 Myer Annual Report reflects the company’s financial and sustainability performance for the period ended 29 July 2017. It covers our retail and store support operations. The Annual Report is prepared for all Myer stakeholders including investors, analysts, customers, suppliers, team members, and the wider community. Content is based on ASX financial and governance reporting guidelines, stakeholder feedback, the Global Reporting Initiative (GRI) G4 Sustainability Reporting Guidelines, and Myer’s business strategy. Further information is available from myer.com.au. ANNUAL GENERAL MEETING The eighth Annual General Meeting of Myer Holdings Limited will be held on Friday 24 November 2017 at 11.00am (Melbourne time). Mural Hall Level 6, Myer Melbourne Store, Bourke Street Mall, Melbourne VIC 3000 Myer Holdings Limited ABN 14 119 085 602 CH AIRMAN AND CE O REPORT HOW HAS THE NEW MYER STRATEGY PROGRESSED IN FY2017? Over the past year Myer has continued to make strong progress across each of the key priorities of our New Myer strategy. This progress has made us a more efficient and resilient business, which has in turn has helped us confront the challenging retail trading conditions. A lot has been achieved but there is still more to do. We are also rapidly evolving and adapting our strategy in response to changing customer habits and preferences, particularly in relation to the digital world. We are prioritising investments in our omni-channel business, in digital and data, and reinforcing our commitment to increased productivity and efficiency. Our omni-channel business continues to deliver strong growth in sales and profit and we will continue to invest heavily in it. We continue to reduce our store footprint through store closures and space hand backs and have substantially reduced our footprint at our Richlands Distribution Centre in Queensland. At our Docklands support office we have handed back over 30 percent of our floorspace. Experiential retailing has been a key focus to drive traffic in our stores. We continue to innovate with new and unique experiences such as an ice skating rink on the top floor of our Sydney CBD store, new cafes and pop up shops. We also introduced dedicated clearance floors which are now in eight stores. 2 Myer Annual Report 2017 Our wanted brands strategy has been further strengthened with the introduction of new wanted brands such as Forever New and Darren Palmer Home. We have rolled out 72 upgraded master brand fit-outs and dedicated service models for Myer Exclusive Brands Basque, Piper and BLAQ. We share investors’ disappointment that Myer was not able to deliver a higher underlying net profit after tax (NPAT) in 2017 in line with our original guidance but we remain convinced that we have a strong and detailed plan to deliver our New Myer strategy. The entire Myer team is committed to achieving this. Against a backdrop of challenging retail trading conditions, Myer has become a leaner, more efficient and more productive business better placed to compete in a rapidly changing environment. While sales declined 1.4 percent to $3,201.9 million reflecting closure of three stores and space hand backs in two stores, and sales on a comparable store basis were down 0.2 percent. Sales per square meter were up 3.7 percent compared to the July 2015 base. Operating Gross Profit (OGP) was $1,220.4 million with OGP margin 58 basis points below last year, reflecting in part the higher concession mix. Our productivity and efficiency initiatives are also delivering results by simplifying the operating model both within stores and the support office. The cost of doing business margin reduced by a further 54 basis points to 31.85 percent. HOW WILL MYER SUCCEED IN THE FACE OF INCREASED COMPETITION? The New Myer strategy is our best response to increased competition. It is important that we focus our efforts on the execution of our strategy, but also to evolve it in response to the ever changing retail landscape and competitive environment. Looking to the year ahead, we will prioritise investment in our omni-channel business which grew both sales and profit in 2017, and also on our productivity and efficiency agenda. Our store network remains a valuable asset and our progress throughout the year has enabled us to deliver a sharper more focused offer as well as a leaner and more resilient business. Despite the challenging conditions the business remains highly cash generative and has a strong balance sheet, which positions us well to continue to invest in the business. Approximately 70 percent of sales at Myer are made with a MYER one card, providing us with a valuable data source that enables us to better understand and engage with our most valuable customers, including through better targeting of our promotions and other communications. HOW ARE YOU ENSURING THAT THE BOARD AND MANAGEMENT TEAM HAVE THE RIGHT SKILLS TO DELIVER NEW MYER? Myer’s Board and senior management team have the right mix of skills and experience to evolve and execute our strategy to address the challenges and opportunities of a changing marketplace. The Board has a deep, diverse and relevant skill set, with experience in traditional retail and also in fields that are shaping the new retail environment such as digital, data, customer experience and brand management. The Board also has a wide range of skills acquired in other sectors and countries that are essential to deliver Myer’s transformation including property, financial, risk management, change and talent management. In October the Board decided to strengthen that skill set to include fashion retailing and luxury brands experience with the appointment of Julie Ann Morrison. Shareholders may recall at the 2016 Annual General Meeting, I indicated that Board renewal was an ongoing focus area. On 11 October I announced my retirement from the Board and confirmed Garry Hounsell will take over as Chairman following the 2017 Annual General Meeting. This follows Garry’s appointment to the Board as a non-executive director in September. Garry has had extensive experience as a Director and Chairman across a broad range of ASX-listed consumer facing businesses, including Qantas Airways, Treasury Wine Estates, Spotless Group Holdings and Dulux Group. In November 2016 we were delighted to welcome JoAnne Stephenson to the Board. In addition, we have confirmed that JoAnne will become Chair of the Audit, Finance and Risk Committee when Anne Brennan steps down from the Board at the forthcoming AGM. During the year we have also strengthened our senior management team with several new appointments, particularly in those areas most relevant to the execution of our strategy. We remain committed to internal succession planning throughout the organisation, and to maintaining a diverse team. Looking beyond the senior leadership team we also employ more than 11,000 team members who are essential to delivering New Myer. The progress made during the past year is testament to their commitment and passion. On behalf of the Board and management team, we thank them for their passion and commitment. HOW DOES MYER ADDRESS ITS RESPONSIBILITIES AS A CORPORATE CITIZEN? Myer has a long and proud history of community involvement. We are particularly proud of the Give Registry program launched in FY2016. Through this program, Myer customers, team members and suppliers have been able to provide 6,200 items in the program’s first 12 months to survivors of family violence as they rebuild their lives. This year Myer joined the United Nations Global Compact, the world’s largest corporate citizenship initiative. We support the ten principles on human rights, labour, environment and anti- corruption that are enshrined in the Global Compact and will continue to implement these principles within our business operations. In FY2017 we participated in the inaugural Australian Sustainable Development Goals summit. You can read more about our performance in the sustainability section on page 20. WHAT’S NEXT FOR THE MYER BUSINESS? Our strong results in online and omni-channel gives us confidence that our digital strategies are on track and we will increase our investments in this area to deliver further gains. A more productive and efficient Myer is an important part our defence against heightened competition and provides us with an additional resilience to tough economic conditions. To deliver this we will further optimise our store footprint and roll out technology enabled process improvements to further drive down our costs. In the year ahead our commitment to delivering New Myer is undiminished while evolving it in response to a changing customer landscape and competitive environment. This means sticking to the strategy, but escalating our focus on innovative experiential retail including new food and services. It also means embracing a stronger omni-channel focus and a more comprehensive use of MYER one data. We know that the next wave of changes to both consumer and competitor behaviour are coming. We have made progress on bringing New Myer to life but there is still much more to do. We are confident that we have the right plan and right team to deliver. Paul McClintock AO Chairman Richard Umbers Chief Executive Officer and Managing Director 3 PE RFORMANCE REVIEW M Y ER HA S BECOME A L E A NER, MO RE PRO DUC TI V E A ND EF FICIENT RE TA IL ER, BE T TER PL ACED TO COMPE TE IN A R A PID LY CHA NG ING EN V IRONMENT SALES* For the 12 month period total sales were down by 1.4 percent to $3,201.9 million, down 0.2 percent on a comparable stores basis. The closure of three stores and space hand backs in two stores impacted the sales result but this was in part offset by continued strong growth in our online business. Sales in the fourth quarter were down 1.5 percent and down 0.2 percent on a comparable stores basis. MARGIN AND CODB* Operating gross profit was $1,220.4 million, with margin down 58 basis points to 38.12 percent broadly reflecting the higher concession mix. We continue to invest to drive improved performance of our Myer Exclusive Brands (MEBs) with upgraded installations and a dedicated brand service model, which has delivered encouraging results. Our focus on reducing the dependency on markdowns to drive sales, favourably impacted the operating gross profit result. brands as concessions in Myer on commercially acceptable terms. As previously outlined in 1H 2017 and Q3 2017 results, the performance of sass & bide has been below expectations during the period with sales in FY2017 $10.9 million below last year. While every effort is being made to improve the performance of the business, the company has recognised an impairment charge of $38.8 million against the carrying value of the business. The write-off of the Austradia investment and the impairment of sass & bide are non-cash individually significant items that have been taken in the FY2017 results. Statutory NPAT was $11.9 million post implementation costs and individually significant items. CASH FLOW AND BALANCE SHEET Net operating cash flows improved by $1 million to $187 million as a result of improved inventory and working capital. Inventory was $24 million below last year at $372 million compared to the end of FY2016 representing a reduction in forward cover of more than one week. Capital expenditure in FY2017 was $97 million reflecting expenditure across the key strategic priorities. During the period, we continued to improve productivity and efficiency by simplifying the operating model both within stores FY2018 OUTLOOK and the support office. The CODB margin reduced by a further In FY2018, Myer anticipates continuing changes to both consumer behaviour and the broader competitive environment. Accordingly, the New Myer agenda will prioritise investments to deliver further gains in omni-channel, and achieve greater productivity and efficiency across all our assets. The Company strongly believes these investments will best position Myer to deliver continued sustainable profit in an increasingly unpredictable environment. 54 basis points to 31.85 percent. NPAT NPAT pre implementation costs associated with New Myer and other individually significant items was $67.9 million. Implementation costs associated with New Myer were $20 million (pre-tax) relating mainly to space optimisation, asset impairments and redundancy costs. On 20 July 2017, Myer announced the decision to write-down the full carrying value of Myer’s 20 percent stake in Austradia of $6.8 million after the business was placed into administration and unsuccessful negotiations to retain the * FY2016 comparisons are on a 52-week basis for comparison purposes 4 Myer Annual Report 2017 TOTAL SALES ($B) OPERATING GROSS PROFIT MARGIN (%) 2017 2016 2015 2014 2013 3.2 3.3 3.2 3.1 3.1 2017 2016 2015 2014 2013 38.1 38.7 40.4 40.9 41.5 NET PROFIT AFTER TAX ($M)* EARNINGS PER SHARE (CENTS) 67.9* 69.3* 77.5* 2017 2016 2015 2014 2013 98.5 127.2 FINANCIAL SUMMARY ($M) Total Sales Operating Gross Profit Operating Gross Profit margin Cost of Doing Business (CODB) Share of Associates Earnings before interest, tax, depreciation, amortisation (EBITDA)* Earnings before interest and tax (EBIT)* Net Profit After Tax (NPAT)* Implementation costs associated with New Myer and individually significant items (post tax) Statutory NPAT * Excludes implementation costs associated with New Myer and individually significant items. SUSTAINABILITY 8.3* 8.8* 2017 2016 2015 2014 2013 13.2* 16.8 21.8 FY2017 FY2016 (52 weeks) (53 weeks) Change 3,201.9 1,220.4 38.1% 3,289.6 1,274.3 38.7% (1,019.8) (1,067.5) (2.5) 198.1 106.6 67.9 (56.0) 11.9 (0.6) 206.2 113.5 69.3 (8.8) 60.5 (2.7%) (4.2%) (62bps) +4.5% (3.9%) (6.1%) (2.0%) (80.3%) 100% NEW SUPPLIERS AGREED TO ETHICAL SOURCING POLICY 7.7% 5.8 REDUCTION IN GREENHOUSE GAS EMISSIONS LOST TIME INJURY FREQUENCY RATE (LTIFR) 51% FEMALE SENIOR MANAGERS $3.1m TOTAL CASH EQUIVALENT CONTRIBUTION TO CHARITY PARTNERS 57% WASTE RECYCLING RATE 5 COMPANY S NAPSHOT M Y ER IS A MO D ERN AUS TR A LI A N RE TA IL ER FO CUS ED ON B RING ING THE LOV E O F SHO PPING TO LIF E THROUGH INS PIRING SHO PPING D ES TIN ATIONS, REL E VA NT TO OUR CUS TOMERS’ LIF ES T Y L ES Myer is Australia’s largest full line department store group, with Myer has a comprehensive risk management plan that enables the more than 60 stores in some of the best locations in Australia. business to make sound decisions, maximise opportunities, and In addition, we own well known Australian apparel brands Marcs to identify and manage risks and uncertainties. Further details and David Lawrence, and Australian womenswear designer brand are available in the Directors’ Report on page 33. sass & bide. Our stores are visited by customers more than 130 million times each year, with our online business attracting more than 70 million user sessions during FY2017. Myer is a significant employer, with more than 11,000 team Myer is a member of the following industry associations and advocacy organisations: > United Nations Global Compact members, of which approximately 6,000 are employed in > Intercontinental Group of Department Stores permenant positions. Approximately 86 percent of the total team are employed under collective bargaining agreements. During Christmas we employ approximately 3,000 additional casual team members. > Australian Packaging Covenant Organisation > Australian Retailers Association > National Online Retailers Association Myer is committed to responsible business growth and integrating > London Benchmarking Group environmental, social and ethical considerations into the way we operate. Our sustainability strategy aims to maximise the positive MYER ONE outcomes and influences we can have on our stakeholders by Our loyalty program, MYER one, has more than five million integrating all aspects of sustainability into our everyday business membership cards in circulation. Members earn Shopping operations. For more information, please see page 20. Credits on purchases at Myer, with these credits converting We have a strong background in philanthropy and a proud history of giving back to our communities. Our team members, suppliers and customers have together raised more than $25 million over the past 13 years. into a Reward Card on a quarterly basis. For every $1,000 spent at Myer, Members receive a $20 Reward Card. In October 2016, we upgraded the MYER one app which has seen more than 520,000 downloads. Increasingly, MYER one Members are electing to receive their quarterly Rewards Card digitally The vast majority of Myer’s business operations are located in via the MYER one app. Australia, and encompass Myer department stores, sass & bide and Marcs and David Lawrence standalone boutiques and concessions in other departments stores, as well as four distribution centres and a support office in Melbourne. Outside of Australia there are two sass & bide boutiques in New Zealand, and sourcing offices in China, Hong Kong, India and Bangladesh with 68 team members in total. Merchandise is transported to six third-party hubs for consolidation and preparation prior to shipment to Myer’s distribution centres in Australia. In addition to Rewards Cards, the program also offers a range of benefits, including member-only shopping events and dedicated email communications. The program has a tiered structure, with benefits increasing in line with spend at Myer. Our top tiered Members enjoy complimentary delivery, invitations to VIP experiences and a voucher for their birthday. Further details about the program and Shopping Credit earning criteria are available online at myerone.com.au. 6 Myer Annual Report 2017 OUR STR ATEGY THE NE W M Y ER S TR ATEGY IS S ECURING THE FUTURE O F ONE O F AUS TR A LI A’S BES T-LOV ED RE TA IL ERS Launched in September 2015, the New Myer strategy represents a plan to invest more than $600 million in capital and implementation costs across five years, to deliver a sharper and more focused offer to our best and most valuable customers. Our strategy is being delivered through four Strategic Priorities; a customer led offer, improving customer service and in-store experience, adopting a truly omni-channel approach, and driving productivity and efficiency. Ultimately, we are focused on bringing the love of shopping to life by providing a desirable shopping destination, relevant to our customers’ lifestyles. Our New Myer strategy is built on four priorities outlined below, and is underpinned by our organisational capability. 1 2 3 4 CUSTOMER LED OFFER WONDERFUL EXPERIENCES OMNI-CHANNEL SHOPPING PRODUCTIVITY STEP-CHANGE > Cluster optimisation > Category optimisation > Brand optimisation > Channel optimisation > Localisation > Supplier collaboration > Elevated visual merchandise > Dwell spaces > Strengthen online proposition > Store network optimisation > Omni-channel experience > Flagship store emphasis > Improved fitting rooms > Right infrastructure and operations > Enhanced Myer Hub > Signature service > Trained and capable staff > Targeted customer engagement > Right-sizing support office > Cost focus and efficiency focus ORGANISATIONAL CAPABILITY > Efficient operating model > Execution focused culture > Technology, processes, systems > Strengthened balance sheet 7 OUR FY2017 HIG HLIGHTS CUSTOMER LED OFFER WONDERFUL EXPERIENCES > Elevated more than 70 Basque, > Innovative customer experiences Piper and Blaq MEB destinations such as the Myer Christmas in-store through shop-in-shops, Giftorium and Wonderland by Myer improved visual merchandising and branding, and dedicated Brand Expert and Field Manager team members > Secured Marcs and David Lawrence as part of the Myer brand portfolio > Created over 360 in-store destinations for new brands including Veronika Maine, > Australian department store first collaboration with Katy Perry > Seven pop up shops and two new cafes > Sydney ice skating rink > New personal shopping suites at seven stores > Fitting room upgrades Industrie, Shoes & Sox, John Lewis at eight stores Homewares, Saba, Oroton, Tom Ford Cosmetics, Radley Handbags, Premium by Jack & Jones and Only denim > Continued to strengthen destination businesses including denim, occasion wear, swimwear, travel, appliances and beauty > Awarded ‘Department Store of the Year’ by Roy Morgan Research > Awarded ‘People’s Choice Award’ by Australian Retailers Association 8 Myer Annual Report 2017 W E HAV E A L RE A DY M A D E HI GHLY V IS IB L E PRO G RES S IN OUR IN-S TO RE E X PERIENCE, BY IMPROV ING OUR R A NG E A ND LIF TING CUS TOMER S ER V ICE. THIS W IL L CONTINUE OMNI-CHANNEL PRODUCTIVITY O R G A N I S AT I O N A L SHOPPING STEP-CHANGE CAPABILITY > Strong growth in omni-channel sales now totalling $177 million in annual sales > Achieved a reduction in online fulfilment costs due to the implementation of the new picking and packing app > Launched new versions of the MYER one app on both iOS and Android platforms > Introduced popular payment method Afterpay for online purchases > Click & Collect reached fifteen percent of orders in July 2017 > Implemented new workforce management tool in all stores > Implemented phase one of our enhanced merchandise management tool > Handed back space at Cairns and Dubbo stores, 50 percent of our Queensland DC and over 30 percent of our support office floorspace > Re-opened Warringah store > Announced decision to not renew leases at Colonnades, Belconnen and Hornsby > New key executive appointments in Merchandise Buying, Planning, Transformation, and Retail Operations > More than 33,000 learning sessions completed on the Myer Academy mobile platform, delivering knowledge to support improved customer service experience > New performance management framework launched 9 C USTOMER LE D OFFE R A G RE AT RE TA IL E X PERIENCE S TA RTS W ITH B R A NDS A ND PRO DUC TS THAT OUR CUS TOMERS LOV E BASQUE, PIPER & BLAQ A key pillar of the merchandise strategy is continuing to strengthen our MEBs. This year we have elevated our MEB Masterbrands Basque, Piper and Blaq, across all touch points. Enhanced product development, cohesive ranging across categories, and clearly defined brand DNA has created improved product that is being supported online and across all marketing channels. The brands have upgraded shopping environments, new fixtures and fittings, and enhanced visual merchandising. To bring the elevated destinations to life, there is a team of dedicated MEB Brand Experts and Field Managers, who showcase the product by wearing it every day, manage the presentation of the merchandise, and ensure that customers receive an improved shopping experience. 10 Myer Annual Report 2017 DESTINATION AREAS Customer-centric innovation has led to the development of destination areas across the business. These areas are easy for customers to shop, themed around lifestyles and shopping behaviour. Examples of destination areas include occasion wear, denim, activewear, luggage, footwear and swimwear. Over the past year, denim destinations have been created in-store, through an expanded range and the introduction of new brands, as well as a dedicated new fixture suite and visual merchandising elements. This year also saw the introduction of all year round swim shops in 20 stores. In womenswear, the occasion wear destination has been strengthened through the range expansion of brands Trent Nathan and Wayne Cooper, the introduction of new brand Grace & Hart, and the expansion of Bronx & Banco to more stores. The occasion wear destination will be further enhanced in September 2017 through the launch of an online shopping hub as well as upgrades to the in-store environment through elevated visual merchandising and branding in selected stores. To deliver a sharper and more focused offer, tailored to our most We have continued the introduction of new brands across our valuable customers, the past year has seen the introduction of new store network this year, with over 360 new installations including brands, the enhancement of our MEB Masterbrands, the elevation the launch of Veronika Maine, Industrie, Shoes & Sox, John Lewis of destination areas, as well as securing Marcs and David Lawrence Homewares, Saba, Oroton, Tom Ford Cosmetics, Radley Handbags, as part of our brand portfolio. Premium by Jack & Jones and Only denim. In the past year, over 70 Basque, Piper and Blaq destinations have We are focused on highlighting newness and driving fashion and been introduced. Utilising MEBs as a key differentiator, the three exclusives, we recently announced that youth brand Forever New, Masterbrands have been elevated through shop-in-shops, new premium surf brands Roxy and Quicksilver in our childrenswear fixtures and fittings, and are supported by a dedicated team of and swim departments, and designer brand The Kooples will be Brand Experts and Field Managers to provide customers with the available in Myer stores later this year. best experience possible. We have made good progress towards a more focused offer, In April 2017, we strengthened our brand portfolio by securing the tailored to our most valuable customers. We continue to enhance future of two Australian brands, Marcs and David Lawrence. These destination areas across the business that are customer-centric brands are currently available as department store concessions and easy to shop. These destinations include denim, travel, including at Myer, at dedicated online stores and at four beauty and swimwear, and make Myer an authority in range. standalone stores across Sydney and Melbourne. We will continue to amplify key destination areas, with upcoming enhancements to our occasion wear and active wear destinations. During our winter fashion parade in March we launched new technology to enable guests to shop the runway direct from their mobile device. This innovation was the first time Myer has enabled attendees of a runway show to shop a catwalk live from the audience. 11 WONDERFUL E XP E RIENCES W E A RE BUIL DING WOND ERFUL E X PERIENCES TO CRE ATE LONG L A S TING MEMO RIES FO R OUR CUS TOMERS WONDERLAND BY MYER Wonderland by Myer in Sydney City brings together Toys, Childrenswear and Gifting in one location, with a focus on theatre to create an elevated customer experience. From the ground floor, a rocket elevator takes customers on a journey through the clouds and delivers them to the gates of Wonderland by Myer. For Christmas, specially recruited and trained performing artists brought Wonderland by Myer to life. In May, the destination was transformed into a winter wonderland, complete with an ice skating rink. Customers were also able to enjoy treats from Doughnut Time and Mr Fitz in the alpine village pop-up. 12 Myer Annual Report 2017 MYER PRESENTS KATY PERRY WITNESS: THE TOUR In July, we announced a partnership with international pop star Katy Perry, as the principle and naming rights partner of her 2018 Witness: The Tour. Myer and Katy will bring the tour to cities across Australia. Ahead of tickets going on sale to the general public, Myer gave customers the chance to win 8,000 tickets in an exclusive MYER one competition. Katy Perry launched the promotion at the Sydney City store on Friday 30 June with an instore appearance. This event was streamed live on social media. She will tour Australia in August 2018. This promotion exceeded our customer engagement expectations. Initiatives such as Wonderland by Myer in Sydney City and our To coincide with the April 2017 Easter school holidays in New collaboration with Katy Perry, demonstrate our commitment to South Wales, customers at the Parramatta store were treated delivering great in-store experiences. to a Thomas the Tank Engine, Barbie and Shopkins children’s This year our Christmas Giftorium featured 38 percent more products than last year, with a wide variety of personalised gifting options including Nutella, M&Ms, Barbie for You and Kikki K. The heart of the Giftorium was our specially recruited experience. Featuring a live stage show and three entertainment zones, the event was well received, with 1,650 tickets sold over the two week period. We will continue to invest in this type of experiential event in FY2018. team who brought theatre and wonder to life in our stores. We were pleased to be awarded ‘Department Store of the Year’ We are investing in priority stores to create unique shopping experiences. We have upgraded our personal shopping suites and key fitting rooms in eight stores, and recruited specially trained personal shoppers and change room consultants to create tailored wardrobes and help customers find the perfect outfit. Our customer experience is evolving from great retail service, to lifestyle services like cafés, wine bars, beauty and grooming. Our new Warringah store in Sydney’s northern beaches was the first physical embodiment of New Myer with a focus on localisation. The store features enhanced dwell spaces including a café and barber. We have also recently opened a new local café at our Macquarie store in Sydney. Throughout the year we have partnered with innovative brands to give customers access to unique shopping experiences, contemporary products and services. In February, Myer was the first Australian department store to collaborate with global car innovator, Tesla, bringing their electric cars to our customers at dedicated showrooms in our Adelaide, Brisbane and Melbourne City stores. by Roy Morgan Research and ‘People’s Choice Award’ by the Australian Retailers Association, an award based on customer satisfaction surveys, independent research and mystery shopping conducted by The Realise Group. 6 13 OMNI -CHAN NEL S HOPPING CUS TOMERS ENG AG E W ITH US ACRO S S M A N Y CHA NNEL S . OUR CONTINUED IN V ES TMENT IN OMNI- CHA NNEL EN A B L ES THIS TO O CCUR S E A ML E S S LY, ONLINE A ND IN-S TO RE OUR NEW PICKING AND PACKING APP We see technology as an enabler to provide our customers with memorable shopping experiences, both in-store and online. A major factor in achieving this in online is our ability to pick and pack purchases quickly and accurately. Launched during the year, our new picking and packing app significantly reduces the steps and time taken to locate and prepare products for either collection or shipping. The app was developed internally, and is affectionately named Zippy. The new app has significantly reduced the time to pick and pack orders by 20 percent, driving down the labour cost and time needed to fulfil, supporting the rapid growth of Myer’s omni-channel business. The new app has also increased our pick success, maintaining our competitive advantage and further driving omni-channel growth. 14 Myer Annual Report 2017 THE NEW MYER ONE APP A new version of the MYER one app was launched in two phases throughout the year, initially to iOS users in October 2016 and then on the Android platform in March 2017. The new app is simpler and easier to use. Developed in close consultation with MYER one members, it has a range of features that provide up-to-date information on purchases and Shopping Credits. It also offers the option for members to elect to receive program Reward Cards electronically. The app provides a quick snapshot of membership tiers, an easy to scan electronic copy of the membership card and Shopping Credit balance on a simple to use dashboard. New features also include being able to track the number of Shopping Credits required to achieve the next reward, a detailed transaction history including receipt numbers of all purchases made using MYER one and a new ‘offers’ section that provides access to member- only offers and events. Our online business continues to deliver significant growth, with store that has the highest number of the specific item to reduce sales up 41 percent due to a much improved customer experience future markdowns. A small range of big and bulky items are fulfilled online as well as an enhanced range. Our home category has via our distribution centres in VIC and NSW. enjoyed strong sales growth and online now represents greater than 10 percent of the home category. During the year, Myer further expanded its payment options with the introduction of innovative retail payment platform Click & Collect continues to grow in popularity and now Afterpay. Myer customers can buy now, receive now, and pay represents approximately 15 percent of all online orders. later, maximising their ability to purchase the latest fashions and Click & Collect leverages our leading store network, providing take advantage of Myer’s many great offers. Myer also began its convenient collection locations and with the introduction of expansion into global markets with the launch of an international our picking, packing and dispatching app, we are able to offer version of the Myer website, offering deliveries to New Zealand. customers same day pick-up, where the order is placed by The international site automatically converts prices to local 12-midday and the selected store is in-stock of the ordered currency, calculates relevant taxes, and offers competitive item. During the year we also enhanced Click & Collect with shipping rates. the introduction of inter-store transfers of products. We have made solid progress in rapidly developing our Picking from stores remains our preferred model. Our fulfilment omni-channel business and we look forward to continuing system chooses items from certain stores to minimise multiple our investment to further improve our offer. deliveries, and where possible, the system will also pick from a Omni-channel sales, including sales via our 2,500 iPads in store, reached $177 million during the year and now represents a penetration of 8.2 percent of overall sales in July 2017. Similarly Click & Collect has grown strongly to now represent 15 percent of orders in July 2017. 15 PRODUCT IVITY S TE P-CHANGE W E REM A IN COMMIT TED TO O PER ATING A MO RE EF FICIENT BUSINES S A ND IMPROV ING THE OV ER A L L PRO DUC TI V IT Y O F THE S PACE THAT W E O CCUPY THROUGH THE A D O PTION O F NE W PRO CES S ES A ND EF FICIENC Y ME A SURES OUR NEW WORKFORCE MANAGEMENT TOOL Our new workforce management tool marks a significant milestone in our journey to New Myer, embracing a simpler, more efficient, customer focused way of operating our stores. Workforce management delivers the right people, in the right place, at the right time. Store team members access a mobile app to clock in and out of their shifts and view their timecards and rosters. Store management also access the system via a mobile device, removing the need to spend time in an office completing administrative tasks. 16 Myer Annual Report 2017 STORES NEW WAY OF OPERATING The Stores New Way of Operating project is removing inefficiency and waste, enabling store teams to focus on activities. In its initial phase, the project has significantly reduced redundant tasks, centralised other tasks and simplified in-store processes. This new way of operating enables store teams to focus on improving the customers’ in-store experience. Reducing store administration offices was a significant achievement during the year, a concept that was initially piloted with the re-opening of the Warringah store in November 2016. In addition to this we have implemented a new store leadership model, supported by comprehensive training. This training provided role clarity, set role expectations and introduced clear metrics. These changes will enable store leadership teams to be cost effective, operate in the most efficient manner and support improved performance. During the year, we continued to optimise our store network new workforce management tool. This new operating model and realign it with our core customers. This was achieved by a has subsequently been adopted by all stores throughout the combination of store closures and space hand backs across the year, with further efficiency initiatives to be delivered prior portfolio. The Wollongong store closed in September 2016 and to Christmas 2017. stores at Brookside and Orange closed in January 2017. Team members were a priority throughout the closure process, with support provided to assist in securing alternative employment. During the year we also implemented the first phase of a new merchandise planning tool. When fully implemented it will offer significant improvements in inventory management, planning and Refurbishment works commenced at the Castle Hill store in stock availability at a store level. We expect this to lead to higher June 2017, and once completed, the store will operate in a smaller sales of items which are heavily in demand, fewer lost sales due to out of stocks and a reduction in markdowns of overstocked items. Implementation will be fully completed by June 2019. We continue to make significant progress in our productivity agenda with a 24,368m2 reduction in space from store closures at Wollongong, Brookside and Orange. more efficient space, with the hand back of approximately 7,000m2. Space hand backs have occurred at the store support office in Melbourne with a total of 9,700m2 handed back by October 2017, and approximately half of the space at the Richlands distribution centre in Queensland. Space hand backs at the Cairns and Dubbo stores were also completed, with minimal business disruption. Refurbishment works also commenced at Maroochydore in Queensland. We continue to review our existing store portfolio to improve productivity. In addition to the store exit already announced for Logan, we also announced that we would not be renewing the leases at Colonnades, Belconnen and Hornsby. The Warringah store reopened in November 2016, in a smaller more efficient space featuring a range of products and services tailored to the unique needs of the local customer. Warringah was the first store to commence operations without a dedicated administration office. This has been achieved through the centralisation of activities and the use of technology to improve and simplify processes such as the implementation of our 17 ORG ANISATIONAL C APABILITY W E A RE IN V ES TING IN OUR TE A M MEMBERS W ITH TR A INING A ND TECHNO LO GY TO IMPROV E OUR CUS TOMERS’ SHO PPING E X PERIENCE MYER ACADEMY 33,353 LEARNING SESSIONS 13,548 UNIQUE VISITORS DIVERSITY AND INCLUSION Diversity continues to be a priority for New Myer. How we lead, how we work and how we include each other and the communities we serve, are guiding principles of our approach to diversity at Myer. Further information about diversity is available on page 21. Our team members are at the very heart of New Myer. We are focused on building their knowledge and capability to bring the love of shopping to life. We now offer a world class training platform, with on-the-go learning modules on brands and services to equip our team members with the know-how to delight our customers. There are now over 30 courses available which includes modules on key MEB Masterbrands and product knowledge, fashion styling, sales and service, and professional development topics. Each month new learning moments are released, encouraging team members to have a reason to re-visit the site regularly to access new content. Since launch there have been more than 13,000 unique team member visitors to the site. We are further supporting the career progression of our team through the recent launch of the new performance management framework. This allows team members to align personal objectives with our company goals, identify learning activities to address capability opportunities, capture ongoing feedback and recognition, and track and evaluate performance. The framework has been developed based on the behaviours, experience, knowledge and mindset required for each role at Myer. Further information about the Myer Board and Management team is available from Myer’s Investor Centre website. Profiles of the directors of the Myer Board are also detailed on page 25. 18 Myer Annual Report 2017 INTRODUCING NEW BOARD MEMBER JOANNE STEPHENSON JOANNE STEPHENSON Independent Non-Executive Director JoAnne was appointed to the Myer Board in November 2016. She is a member of the Audit, Finance and Risk Committee. JoAnne has more than 25 years’ experience spanning a range of industries. JoAnne was previously a senior client partner in the Advisory division at KPMG and has key strengths in finance, accounting, risk management and governance. JoAnne holds a Bachelor of Commerce and Bachelor of Laws (Honours) from The University of Queensland. She is also a member of both the Australian Institute of Company Directors and Chartered Accountants Australia and New Zealand. INTRODUCING NEW EXECUTIVE APPOINTMENTS During the year we appointed a number of new senior leaders with the capability required to support our transformation. Recent executive appointments include Karen Brewster as Executive General Manager Merchandise Buying, Damian Walton as Executive General Manager Merchandise Planning, and Peter Mitchley Hughes as Head of Transformation. KAREN BREWSTER Executive General Manager Merchandise Buying Karen was appointed as Executive General Manager Merchandise Buying in July 2017. In this role she has responsibility for all merchandise categories including Mens and Womens Apparel, Beauty, Intimate Apparel, Childrenswear, Accessories, Footwear, Home and Entertainment. Karen has held a variety of senior roles across Myer in Buying, Planning, Analysis and Business Administration. DAMIAN WALTON Executive General Manager Merchandise Planning Damian was appointed Executive General Manager Merchandise Planning in July 2017. In this role Damian’s responsibilities include the overall planning of the merchandise strategy, managing the merchandise budget, financial performance of the business and controlling inventory for the company. Damian is a career merchant with over 27 years’ experience working across Australia and the UK, including at Selfridges, Marks & Spencer and House of Fraser. PETER MITCHLEY-HUGHES Head of Transformation Peter was appointed Head of Business Transformation in January 2017 and is responsible for delivering all aspects of the New Myer transformation. Peter has over 20 years’ experience in FMCG and retail companies. He has a proven record in enterprise business transformation, operational efficiency, organisational change and program delivery. In the UK, he worked for Marks & Spencer as Head of Commercial Finance, followed by the development and delivery of the new M&S.com multichannel platform. 19 S USTAINABILITY A T MYER M Y ER IS COMMIT TED TO BUIL DING A S O CI A L LY RES PONSIB L E BUSINES S A ND INTEG R ATING SUS TA IN A BILIT Y INTO E V ERY DAY BUS INES S PR AC TICE S MYER SUSTAINABILITY FRAMEWORK AND MATERIAL ISSUES CUSTOMER TEAM COMMUNITY ENVIRONMENT BUSINESS > Customer service and satisfaction > Attraction and engagement > Myer Community Fund > Energy and emissions > Reward and recognition > Giving our time > Packaging > Strategic community stewardship > Workplace safety partnerships > Waste and recycling > Ethical sourcing > Code of conduct > Product responsibility Our sustainability strategy has five focus areas: Customer, Team, Community, Environment and Business. Each of these is supported by metrics to enable us to measure our performance. CUSTOMER SERVICE AND SATISFACTION The customer is at the heart of everything we do. This year we took steps to improve customer service through deployment of our new The results of stakeholder engagement that occur during the year workforce management tool that better aligns staffing levels with are used to inform our reporting. This year we also gave particular customer needs. We improved our understanding of customer consideration to the Sustainable Development Goals, the Global satisfaction by enhancing our methodology for obtaining feedback Compact principles and the Global Reporting Initiative Standards, from people who visit our stores. We also relaunched the MYER alongside our annual peer review. Myer has ongoing engagement with customers, team members, suppliers, shareholders, local communities and civil society. Our engagement channels include social media, our customer service centre, customer feedback programs, team member updates, supplier forums, proactive and reactive media engagement, investor and stakeholder meetings, and multi-stakeholder forums. Myer identifies which groups to engage with on a proactive and reactive basis. As required, issues raised by stakeholders are escalated to senior management and where appropriate, to the Board. For more information on our sustainability strategy and performance, and to view our FY2017 Global Reporting Initiative Index, please visit myer.com.au. one app and expanded the MYER one membership to gain a better understanding of our customers shopping habits. TALENTED AND CAPABLE PEOPLE Attracting and developing talented and capable people is vital in the delivery of our New Myer strategy. We have been enhancing skills in product, sales and service through the Myer Academy mobile learning platform with over 13,000 users accessing learning moments. Myer is also investing in how the organisation inducts new employees, building their job readiness as well as investing in store leadership capability. Our approach to performance management and development supports people leaders to undertake regular, meaningful performance and development discussions with team members. 20 Myer Annual Report 2017 DIVERSITY AND INCLUSION PARTNERING FOR POSITIVE IMPACT At Myer, we understand the value of diversity and inclusion. Myer’s Myer has a proud history of community investment. Giving back approach to diversity and inclusion is focused on how we lead, how is part of our organisational DNA. As an influential Australian we work and how we include others, including the communities we retailer we have a unique opportunity to make a positive social serve. In FY2017 we developed a strategy with three priorities being impact by enabling our team members, suppliers and customers cultural diversity, LGBTI awareness and inclusion, and increasing to contribute to addressing important social issues. female representation at senior leadership levels. Specific inclusion plans are now in place for these three areas. Our community investment and partnerships are aligned with the theme ‘empowering and supporting women; strengthening Myer’s current workforce composition is 80 percent female, families’. We work primarily with our national partners White with 58 percent of managers, 51 percent of senior managers and 38 percent of our Board being female1. In FY2017, as in previous years, we undertook a review of gender pay equity within Myer and corrected a small number of like-for-like gaps. Ribbon Australia, Global Sisters and The Salvation Army to reduce family violence and its effects. Our three major fundraising programs are: Myer is focused on strengthening its talent pipeline and ensuring a > The Myer Community Fund Precious Metal Ball with our suppliers balanced workforce composition through many of its diversity and > Point of Sale Round-up, giving customers the opportunity inclusion initiatives. These initiatives include talent management to ‘round-up’ their purchase to the nearest dollar and succession planning, leadership development, the Myer Academy Masterclass Diversity series, Flex@Myer and actively supporting team members as they return from extended leave. > Team member fundraising activities at every Myer store, distribution centre and the national support office for smaller innovative projects in their local area SAFETY AT WORK Myer treats the safety of our team members, customers and suppliers as a priority and we are committed to continually improving our safety performance. The importance of safety is actively built into our culture and is managed through having a robust safety management system. Our safety management system underwent a full review and relaunch in FY2017 with a focus on making our safety systems easy and accessible to our team and promoting safety as a shared responsibility. We have encouraged reporting hazards through raising team member awareness and ensuring our safety committees play a role at our sites. In FY2017 we were pleased to have achieved a further reduction in Myer’s Lost Time Injury Frequency Rate (LTIFR), building on our achievements during the last seven years. Donations go to the Myer Community Fund, and are used to support the important work of our national and local community partners, aligned to our community investment theme. The Myer Community Fund is overseen by an independent Board and the effectiveness of the fundraising programs and impact of investments are evaluated annually. In FY2017 the Myer Community Fund provided $611,000 to our national community partners. These funds: > Assisted The Salvation Army in providing over 32,000 instances of family violence support such as crisis accommodation, specialist safety planning, counselling and outreach > Supported 360 ‘Global Sisters’ with specific vulnerabilities, in their aspiration to achieve financial independence through micro business and retail marketing support > Helped prevent violence towards women through the delivery of White Ribbon Australia’s award-winning ‘Breaking the Silence’ schools program, delivered to 100 schools across Australia, reaching 36,000 students 1 Reporting period 1 April 2016 to 31 March 2017. 21 PRECIOUS METAL BALL 2017 The Myer Community Fund Precious Metal Ball is one of the premiere occasions on Myer’s annual event calendar. This year’s Precious Metal Ball was the largest in its 13-year history, with total proceeds of over $1 million raised through financial and product contributions made on the night. More than 1,000 guests from the retail, business and fashion industries attended the event, with special guests, The Face of Myer, Jennifer Hawkins and Myer Ambassador, Kris Smith. Proceeds raised on the night support the work of the Myer Community Fund’s key beneficiary, White Ribbon Australia, as well as the work of over 60 of our store-partnered charities, in family violence prevention, cultural change and victim support. GIVE REGISTRY CHANGES LIVES The Give Registry, Myer’s flagship community partnership program with The Salvation Army, gives expression to our active commitment to preventing violence against women, by offering much needed practical support to women and children rebuilding their lives. The Give Registry is a twist on the traditional department store ‘gift’ registry. It is a list of essential items that can be bought and donated to victims of family violence at any Myer GLOBAL RECOGNITION FOR MYER AND THE GIVE REGISTRY Finalists in: > 2017 World Retail Awards ‘Responsible Retailer of the Year’ > 2017 World Department Store Forum Awards ‘World’s Best Store Campaign by a Department Store’ > 2017 Cannes Lion ‘Integrated Lion’ Award store. Myer matches the total value of our customers’ product > 2017 Ethical Corporation Responsible Business Awards donations, and distributes these items to The Salvation Army ‘Best Engagement Campaign of the Year’ who in turn deliver them to women in need. Winner: > 2017 Clio Awards - Best Integrated Campaign and Best Brand Partnerships & Collaborations In the first 12 months of the program, over 6,200 products were gifted to 371 women and their children across Australia. Items included bedding and bath, kitchen and dining, small electrics, intimate apparel and many other essential day-to-day items. Over 6,000 customers have participated in the initiative, and together with the generous involvement of key suppliers Sheridan, LinenHouse, PVH Brands Australia, Maxwell & Williams, Breville and Bonds, we have raised a collective contribution of RRP $323,260 in cash and product in FY2017. “These items to me represent ‘hope’. Having nothing to start with is quite overwhelming, especially having to start over again. Being a recipient of such generosity has humbled me greatly, and has given me encouragement in this next step”. Family violence survivor and Give Registry recipient 22 Myer Annual Report 2017 $3.1m TOTAL CASH EQUIVALENT CONTRIBUTION TO CHARITY PARTNERS $1.5m MYER DIRECT TIME, CASH AND GOODS $1.6m FACILITATED FUNDRAISING FROM CUSTOMERS, SUPPLIERS AND TEAM MEMBERS ENERGY AND EMISSIONS Energy use and associated greenhouse gas emissions are a key environmental impact area for Myer. We work toward reducing greenhouse gas emissions from our own operations through implementation of our five year energy strategy, which aims to reduce the energy intensity of the business by 10 to 15 percent by FY2018. Our strategy includes behavioural change, control system and equipment efficiency measures. We manage and report on direct and indirect (scope 1 and 2) emissions in Australia where we have operational control. We review our program annually as part of the budget cycle. In FY2017 we focused on identifying and rectifying control breakdowns and continuing our behavioural change activities. Myer’s total energy use for FY2017 was 631 GJ, or 146,606 tonnes of carbon dioxide equivalent greenhouse gas emissions. This represented a 7.3 percent reduction in energy use on the prior year. The energy intensity of our business further reduced by 1.6 percent on FY2016, and by a total of 12.8 percent since FY2013. The benefits of investment in building management systems in the previous year also contributed to this result, along with targeted review and management of operating controls. WASTE AND RECYCLING Packaging and waste disposal associated with our merchandise are significant potential environmental impact areas for Myer. We are a signatory to the Australian Packaging Covenant, which is a sustainable packaging initiative that encourages businesses to design more sustainable packaging in order to reduce manufacturing impacts on the environment and increase recycling rates, as well as to reduce packaging litter. We develop and implement an action plan to reduce our impacts, and report on progress annually. A full review and refresh of packaging for online customers was undertaken, resulting in a number of improvements that resulted in less packaging while enhancing the customer experience. We reduced the weight and volume of packaging, including a shift from bubble wrap to air pillows, bubbled to plain satchels, and removing the requirement for a second box by reducing carton sizes or replacing second box with film wrap. We have also been improving our Click & Collect service which reduces delivery wait times for the customer, as well as reducing packaging and transport impacts. We have a comprehensive reuse and recycling system in place for our major waste streams including cardboard, clear flexible plastics, hangers, damaged and unsold stock, timber pallets, security tags and metals. In FY2017 we completed the roll out of an optimised recycling system, co-funded by the Australian Packaging Covenant. The project resulted in an in-store packaging recycling rate above 80 percent, and we shared what we learnt through the project publicly with industry. We subsequently launched an internal waste and recycling leader board for store management as part of embedding the optimised system. Our total waste generation from day-to-day store activities fell significantly, driven primarily by the strong merchandise focus on range optimisation, and partly enabled by the optimised recycling system roll out. Significant construction and demolition waste offset most of this reduction, due to store closures and a major project to dispose of old fixturing. Overall we saw a total reduction in waste of two percent. PLASTIC BAGS Myer shopping bags are made from low density polyethylene. They are strong, cost effective, and fit for the purpose of protecting and carrying customer purchases. They can be reused again and again, and once they are no longer fit for reuse, they can be recycled by dropping them off at any REDcycle collection point, www.redrecycle.net.au SUPPLY CHAIN AND ETHICAL SOURCING Myer is committed to sourcing merchandise that is produced in safe and fair working conditions, where the human rights of workers are respected and impacts on the environment are minimised. This commitment is supported by our Ethical Sourcing Policy, and a framework which measures supplier adherence, identifies breaches and continuously improves the ethical performance of our supply chain. All merchandise suppliers must adhere to our Ethical Sourcing Policy, which is based on internationally accepted human rights and labour standards. Our policy specifically prohibits the use of forced, compulsory labour or child labour, and requires suppliers to respect the right to freedom of association and collective bargaining (and not hinder alternatives where those rights are restricted under local laws). It also requires suppliers not to engage in acts of bribery or corruption. Our Ethical Sourcing Framework for MEBs includes: > The inspection and assessment of proposed factories. Suppliers will not be utilised until the audit report is accepted > Factories are rated against a supplier risk profile, which includes a country risk ranking > Determining when suppliers will be audited and reviewed as per the ethical sourcing framework and audit cycle > Assessing the risk level of issues identified during audits > Implementing remedial action plans or withdrawal of supply for noncompliant suppliers, depending on the severity of the breach 23 Our audit program focuses on our supplier relationships and does not extend to the relationships of our suppliers (manufacturers) with their suppliers (mills/materials producers and farms), unless they are vertically integrated suppliers. The majority of our MEB merchandise is sourced from China through our dedicated global sourcing offices, Myer Sourcing Asia Limited, located in Hong Kong and Shanghai. We also source a small proportion from trusted importers located in Australia with whom we have long-standing relationships. More than 95 percent of MEB merchandise is sourced from the countries of China, India, Italy, Bangladesh and Vietnam. Myer continues to work with our suppliers to improve their ethical sourcing procedures and ensure compliance with our Ethical Sourcing Policy. In FY2017 our focus areas included existing vendor re-certification as well as building stronger relationships and improving transparency with Myer’s Australian-based sourcing suppliers. In FY2017 we completed audit reviews of 189 suppliers (236 factory audits) within our MEB network. Our review identified no zero tolerance issues and 28 high risk issues, which primarily relate to excessive overtime hours and safety improvements required. Myer will continue to work with factories to address high risk issues identified. CODE OF CONDUCT PRODUCT RESPONSIBILITY We take pride in the quality of our merchandise. We have extensive quality and compliance processes in place to ensure our merchandise is well made, safe to use and labelled with key consumer information. We review and update our compliance guidelines annually to ensure the latest in global and industry standards are adhered to. We have a dedicated quality assurance and compliance team and we train buyers in compliance requirements every quarter. We evaluate our performance through an internal audit program on our QA/QC processes, with the results, actions and recommendations informing our QA strategy. We track all customer complaints and sample development issues to provide an early warning system of quality and safety trends. In FY2017 we introduced a formalised risk assessment methodology which provides a framework for assessing quality and safety issues. We increased our surveillance testing of apparel items and are testing earlier to better manage quality issues before they reach our stores. Our merchandise compliance is improving, with a 15 percent reduction in our total number of withdrawals and recalls in FY2017. The products we sell have environmental impacts during use by our customers. Appliances and equipment such as whitegoods and TVs account for about one quarter of energy use in the average household, according to the most recent residential energy baseline study. In FY2017 we provided further training to Myer is committed to the highest levels of integrity and ethics in selling team members on how to assist customers to compare the our business operations and interactions with stakeholders. We financial and environmental impacts of different appliance models. implement this commitment through our Code of Conduct, team This enables customers to save money and reduce greenhouse gas member training and a whistle blower program. Team members are emissions, and also improves Australia’s energy productivity. required to acknowledge acceptance of the Code of Conduct prior to commencing work. An annual refresher on Code of Conduct for salaried team members is undertaken. The Myer confidential whistle blower hotline service is also communicated to team members, contractors, and suppliers. SUSTAINABILITY PERFORMANCE AND TARGETS Focus area Key measure Customer Net Promoter Score Team Diversity and inclusion (% female senior managers) Workplace safety (LTIFR) Community Direct community contribution (% EBIT) Environment Greenhouse gas emissions reduction (%) Energy intensity (kJ/m2.opening hour) Recycling rate (%) Business New suppliers agreed to Ethical Sourcing Policy (%) Code of Conduct training (% of required team members trained) FY15 FY16 FY17 Performance Performance Performance Achieved target Achieved target ● Target not met1 FY18 Target Improvement2 48 7.7 0.8 2.7 175.5 58 100 86.5 49 ● 6.0 ● 1.6 ● 5.9 ● 169.3 ● 60 ● 100 ● 51 5.8 1.4 7.7 166.6 57 100 87.0 ● Increase ● 85.9 Maintain ≥50 <5.8 >0.5 ≥1 ≤166 ≥56 100 ≥80 - Shrinkage Minor increase 1 2 The Net Promoter Score transitioned to a new measurement methodology in mid FY2017. ● Improved/met target ● Did not reach target On a comparable stores basis. Note: Previous FY targets are available in Myer’s Annual Reports on our Investor Centre website. 24 Myer Annual Report 2017 DIRECTORS’ REPORT Your directors present their report on the consolidated entity consisting of Myer Holdings Limited ABN 14 119 085 602 (the Company or Myer) and the entities it controlled (collectively referred to as the Group) at the end of, or during the financial period ended 29 July 2017. 1. DIRECTORS The following persons were directors of the Company during the financial period and/or up to the date of this Directors’ Report: Director Paul McClintock AO Richard Umbers Anne Brennan Ian Cornell Chris Froggatt Bob Thorn Dave Whittle JoAnne Stephenson Position Date appointed Chairman from 10 October 2012 8 August 2012 Independent non-executive director CEO and Managing Director 2 March 2015 Independent non-executive director 16 September 2009 Independent non-executive director 6 February 2014 Independent non-executive director 9 December 2010 Independent non-executive director 6 February 2014 Independent non-executive director 30 November 2015 Independent non-executive director 28 November 2016 JoAnne Stephenson was appointed to the Board with effect from 28 November 2016. All other directors served as directors of the Company for the whole financial period and until the date of this Directors’ Report. Details of the qualifications, experience, and special responsibilities of each current director are as follows: PAUL MCCLINTOCK AO Chairman RICHARD UMBERS Chief Executive Officer and Managing Director > Independent non-executive director > Member of the Board since 2 March 2015 > Member of the Board since 8 August 2012 > Appointed Chairman 10 October 2012 > Chairman – Nomination Committee Richard was appointed CEO and Managing Director of Myer in March 2015. In his role, Richard is responsible for leading the organisation, and delivering a significant program of change and reinvigoration to ensure that Myer continues to be an exciting Paul has held significant chairman and advisory positions across destination for all of our customers. Richard joined Myer in a broad range of industries, as well as government. He is highly September 2014 as Chief Information and Supply Chain Officer, regarded for his wide and varied experience, including his role with responsibility for online strategy, financial services and MYER as the Secretary to Cabinet and Head of the Cabinet Policy Unit. one, as well as the logistics and IT functions. Prior to joining Myer, Paul’s former positions include chairman of Thales Australia, Richard was Executive General Manager for Parcel and Express Medibank Private Limited, the COAG Reform Council, the Expert Services at Australia Post, and also held the position of CEO for Panel of the Low Emissions Technology Demonstration Fund, Intoll StarTrack. Richard also had responsibility for the enterprise- Management Limited, Symbion Health, Affinity Health, Ashton wide eCommerce program, a major change initiative designed Mining, Plutonic Resources, and the Woolcock Institute of Medical to position Australia Post to take advantage of the boom in Research. He was also a director of the Australian Strategic Policy online shopping. Institute and Perpetual Limited, a Commissioner of the Health Insurance Commission, and a member of the Australia-Malaysia Institute Executive Committee. Paul graduated in Arts and Law from the University of Sydney and is an honorary fellow of the Faculty of Medicine of the University of Sydney and a Life Governor of the Woolcock Institute of Medical Research. Paul resides in New South Wales. Other current directorships Paul is chairman of NSW Ports, I-MED Australia and Broadspectrum, a subsidiary of Ferrovial Services. He is also a director of St Vincent’s Health Australia, O’Connell Street Associates and The George Institute for Global Health. Richard has previously held a range of senior and general management positions in fast moving consumer goods (FMCG) retailing with roles at Woolworths in Australia and New Zealand, and Aldi in Europe. Richard has a Master of Science degree in Finance from the University of Leicester (UK), and a Bachelor of Science with honours in Geology and Geography from The University of Exeter (UK). He is also a graduate of the Australian Institute of Company Directors. Richard resides in Victoria. 25 DIRECTORS’ REPORT Continued ANNE BRENNAN Independent non-executive director CHRIS FROGGATT Independent non-executive director > Member of the Board since 16 September 2009 > Member of the Board since 9 December 2010 > Chairman – Audit, Finance and Risk Committee > Chairman – Human Resources and Remuneration Committee > Member – Human Resources and Remuneration Committee > Member – Nomination Committee > Member – Nomination Committee Anne brings strong financial credentials and business acumen to Myer, including her experience from senior management roles in both large corporate organisations and professional services firms. Anne has more than 20 years’ experience in audit, corporate finance, and transaction services including executive roles as the Chief Financial Officer (CFO) at CSR, and 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. During her time at Ernst & Young, Anne was a member of the national executive team and a board member. Anne holds a Bachelor of Commerce (Honours) degree from University College Galway. She is a Fellow of the Chartered Accountants Australia and New Zealand and a Fellow of the Australian Institute of Company Directors. Anne resides in New South Wales. Other current directorships Anne is a director of Argo Investments Limited, Charter Hall Group, Nufarm Limited and Rabobank Limited (Australia and New Zealand), as well as O’Connell Street Associates. Chris has a broad industry background, including experience in consumer branded products, retailing, and hospitality across numerous industries such as beverages, food, and confectionery. She has more than 20 years’ executive experience as a human resources specialist in leading international companies including Brambles Industries, Whitbread Group, Mars, Diageo, and Unilever NV. Chris has served on the boards of Britvic, Sports Direct International, and Goodman Fielder Limited; as well as being a director of the Australian Chamber Orchestra and the Australian Chamber Orchestra Instrument Fund, 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 (United Kingdom). 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. BOB THORN Independent non-executive director IAN CORNELL Independent non-executive director > Member of the Board since 6 February 2014 > Member – Audit, Finance and Risk Committee > Member of the Board since 6 February 2014 > Member – Human Resources and Remuneration Committee Bob brings considerable general business and senior retail management experience to Myer from 13 years at Super Retail Group; nine of those years in the role of Managing Director. During Ian has extensive experience in the retail industry across a number his time at the company, Bob drove Australia and New Zealand of senior retail roles, including 11 years at Westfield. During his expansions and led the creation of the Boating Camping Fishing time at Westfield, Ian was Head of Human Resources for seven (BCF) business, the market leader in camping and leisure. Prior to Bob’s 13 years with Super Retail Group, he was previously General Manager at Lincraft, and held senior roles at other major retailers including nine years with David Jones. Bob has also been the chairman of Cutting Edge. He was also a director at WOW Sight and Sound, MotorCycle Holdings Limited, Babies Galore, and Unity Water. Bob is a member of the Australian Institute of Company Directors. years and also responsible for retailing relationships in Australia and New Zealand. He also spent three years as the Head of Management and Marketing for Westfield’s shopping centres in Australia and New Zealand and has extensive experience in large scale retail operations and responding to changing consumer trends. Prior to joining Westfield, Ian was chairman and CEO of supermarket chain, Franklins, and earlier spent 22 years at Woolworths, including his role as Chief General Manager Supermarkets. Ian has previously been a director of Goodman Fielder Limited. Ian is also a Fellow of the Institute of Management, a Fellow of the Human Resources Institute, a member of the Institute of Company Directors, and a graduate of the Advanced Management Programme at Harvard. Ian resides in New South Wales. Other current directorships Ian is the non-executive chairman of Baby Bunting Group Ltd and a non-executive director of Inglis Bloodstock, as well as of the PKD Foundation of Australia, a charitable foundation raising funds for medical research into kidney disease. 26 Myer Annual Report 2017 DIRECTORS’ REPORT Continued DAVE WHITTLE Independent non-executive director JOANNE STEPHENSON Independent non-executive director > Member of the Board since 30 November 2015 > Member of the Board since 28 November 2016 > Member – Audit, Finance and Risk Committee > Member – Audit, Finance and Risk Committee Dave has considerable brand, marketing, data, technology, JoAnne has extensive experience spanning over 25 years across a online retail and digital transformation experience. range of industries. JoAnne was previously a senior client partner For three years Dave has been the CEO of Lexer, an innovative provider of data, software and advice, helping enterprise companies genuinely understand and engage their customers. Previously, Dave spent 10 years with global advertising group M&C Saatchi in a number of local and international leadership roles, culminating in three years as Managing Director in Australia. Prior to joining M&C Saatchi, Dave was the first employee of in the Advisory division at KPMG and has key strengths in finance, accounting, risk management and governance. JoAnne holds a Bachelor of Commerce and Bachelor of Laws (Honours) from The University of Queensland. She is also a member of both the Australian Institute of Company Directors and the Chartered Accountants Australia and New Zealand. JoAnne resides in Victoria. a marketing services group that built four digital service and Other current directorships software businesses. Dave has a Bachelor of Arts and a Bachelor of Commerce from Deakin University. Dave resides in New South Wales. Other current directorships Dave is an executive director of Lexer Pty Ltd and a non-executive director of the Melbourne Festival and the GWS GIANTS Foundation. 2. DIRECTORSHIPS OF OTHER LISTED COMPANIES JoAnne is also an Independent Non-Executive Director of Challenger Limited, Asaleo Care Limited and Japara Healthcare Limited. She is also Chair of the Audit and Risk Committee of the Department of Health and Human Services (Victoria), the Victorian Major Transport Infrastructure Board and the Melbourne Chamber Orchestra. The following table shows, for each person who served as a director during the financial period and/or up to the date of this Directors’ Report, all directorships of companies that were listed on the ASX, other than the Company, since 27 July 2014, and the period during which each directorship has been held. Director Paul McClintock AO Richard Umbers Anne Brennan Listed entity - - Charter Hall Group Nufarm Limited Ian Cornell Chris Froggatt Bob Thorn Dave Whittle JoAnne Stephenson Argo Investments Limited Echo Entertainment Group Limited (now The Star Entertainment Group Limited) Goodman Fielder Limited Baby Bunting Group Limited Goodman Fielder Limited MotorCycle Holdings Limited PWR Holdings Limited - Challenger Limited Asaleo Care Limited Japara Healthcare Limited * Mr Thorn ceased to be a director of PWR Holdings Limited on 3 March 2017. Period directorship held - - October 2010 – present February 2011 – present September 2011 – present March 2012 – October 2014 February 2014 – March 2015 January 2015 – present August 2009 – March 2015 March 2016 – July 2016 August 2015 – March 2017* - October 2012 – present May 2014 – present September 2015 – present 27 DIRECTORS’ REPORT Continued 3. MEETINGS OF DIRECTORS AND BOARD COMMITTEES The number of meetings of the Board and of each Board Committee held during the period ended 29 July 2017 are set out below. All directors are invited to attend Board Committee meetings. Most Board Committee meetings are attended by all directors; however, only attendance by directors who are members of the relevant Board Committee is shown in the table below. Director of directors** and Risk Committee Remuneration Committee Nomination Committee Meetings Audit, Finance Human Resources and Meetings Attended Meetings Attended Meetings Attended Meetings Attended Held* Held* Held* Held* Paul McClintock AO Richard Umbers Anne Brennan Ian Cornell Chris Froggatt Bob Thorn Dave Whittle JoAnne Stephenson 11 11 11 11 11 11 11 7 11 11 11 11 11 10 11 6 - - 4 - - 4 4 2 - - 4 - - 3 4 2 - - 5 5 5 - - - - - 5 5 5 - - - * Number of meetings held during the time the director held office or was a member of the Committee during the year. ** Teleconferences outside of scheduled Board meetings have not been included in the table above. 4. DIRECTORS’ RELEVANT INTERESTS IN SHARES 7 - 7 - 7 - - - 7 - 7 - 7 - - - The following table sets out the relevant interests that each director has in the Company’s ordinary shares or other securities as at the date of this Directors’ Report. No director has a relevant interest in a related body corporate of the Company. Director Paul McClintock AO Richard Umbers Anne Brennan Ian Cornell Chris Froggatt Bob Thorn Dave Whittle JoAnne Stephenson Ordinary Shares CEO Restricted Shares Performance Rights 258,400 212,230 75,122 16,000 24,056 225,400 12,345 Nil Nil 114,617 Nil Nil Nil Nil Nil Nil Nil 2,316,322 Nil Nil Nil Nil Nil Nil 5. COMPANY SECRETARY AND OTHER OFFICERS Richard Amos was appointed as Company Secretary of the Company on 6 July 2015, as well as being appointed as Chief General Counsel of the Group. Myer’s Chief Financial Officer is Grant Devonport. Details of their experience and background is set out in the Management Team section of Myer’s Investor Centre website. 6. PRINCIPAL ACTIVITIES During the financial period, the principal activity of the Group was the operation of the Myer department store business. 28 Myer Annual Report 2017 DIRECTORS’ REPORT Continued 7. OPERATING AND FINANCIAL REVIEW SUMMARY OF FINANCIAL RESULTS FOR 52 WEEKS ENDED 29 JULY 20171 > Sales down 1.4% to $3,201.9 million, down 0.2% on a comparable store basis > Sales / m2 up 3.7% compared to the FY2015 base year > Q4 sales down 1.5%, down 0.2% on a comparable store basis > Operating gross profit (OGP) of $1,220.4 million, with OGP margin 58 basis points below last year > Cost of doing business (CODB) down $31.4 million to $1,019.8 million with CODB margin improved by 54 basis points to 31.85% > FY2017 Net Profit After Tax (NPAT) (pre implementation costs and individually significant items) of $67.9 million (FY2016: $69.4 million) > Statutory NPAT of $11.9 million post implementation costs of $13.9 million and individually significant items of $42.1 million (post-tax) > Operating cash flow improved by $1 million to $187 million > Final dividend of 2.0 cents per share, fully franked, to be paid on 9 November 2017 (Record Date is 28 September 2017) For the 12 month period total sales were down by 1.4% to $3,201.9 million, down 0.2% on a comparable stores basis. The closure of three stores and space hand backs in two stores impacted the sales result but this was in part offset by continued strong growth in our online business. Sales in the fourth quarter were down 1.5% and down 0.2% on a comparable stores basis. Operating gross profit was $1,220.4 million, with margin down 58 basis points to 38.12% broadly reflecting the higher concession mix. We continue to invest to drive an improved performance of our Myer Exclusive Brands (MEBs) with upgraded installations and a dedicated brand service model which has delivered encouraging results. Our focus on reducing the dependency on markdowns to drive sales, favourably impacted the operating gross profit result. During the period, we continued to improve productivity and efficiency by simplifying the operating model both within stores and the support office. The cost of doing business margin reduced by a further 54 basis points to 31.85%. Net finance costs reduced by $3.5 million to $10.8 million largely as a result of lower average net debt. On 20 July 2017, Myer announced the decision to write-down the full carrying value of Myer’s 20% stake in Austradia of $6.8 million after the business was placed into administration and unsuccessful negotiations to retain the brands as concessions in Myer on commercially acceptable terms. As previously outlined in 1H 2017 and Q3 2017 sales results, the performance of sass & bide has been below expectations during the period with sales in FY2017 $10.9 million below last year. While every effort is being made to improve the performance of the business, the Company has recognised an impairment charge of $38.8 million against the carrying value of the business. The write-off of the Austradia investment and the impairment of sass & bide are non-cash individually significant items that have been taken in the FY2017 results. NPAT pre implementation costs associated with New Myer and other individually significant items was $67.9 million. Implementation costs associated with New Myer were $20 million (pre-tax) relating mainly to space optimisation, asset impairments and redundancy costs. Net operating cash flows improved by $1 million to $187 million as a result of improved inventory and working capital. Inventory was $24 million below last year at $372 million compared to the end of FY2016 representing a reduction in forward cover of more than one week. Capital expenditure in FY2017 was $97 million reflecting expenditure across the key strategic priorities. 1 FY2016 results are on a 52-week basis for comparison purposes 29 DIRECTORS’ REPORT Continued INCOME STATEMENT FOR THE 52 WEEKS TO 29 JULY 2017 FY2017 FY2016** Change Change Total Sales Value Concessions Myer Exclusive Brands National Brands and other Operating Gross Profit Operating Gross Profit margin Cost of Doing Business Cost of Doing Business/Sales Share of Associates Dilution of Investment in Associate EBITDA* EBITDA margin* Depreciation and amortisation EBIT* EBIT margin* Net Finance Costs Net Profit Before Tax* Tax* Net Profit After Tax (NPAT) (pre implementation costs and individually significant items) Implementation costs and individually significant Items (post tax) NPAT (post implementation costs and individually significant items) * Excluding implementation costs associated with New Myer and individually significant items. ** FY2016 results are on a 52-week basis for comparison purposes. BALANCE SHEET AS AT 29 JULY 2017 Inventory Other Assets Less Creditors Less Other Liabilities Property Fixed Assets Intangibles Total Funds Employed Comprising of: Debt Less Cash Net Debt Equity 30 Myer Annual Report 2017 52 weeks 52 weeks $m $m 3,201.9 3,245.9 701.7 546.8 600.0 610.5 1,953.4 2,035.4 1,220.4 38.12% (1,019.8) 31.85% (1.2) (1.3) 198.1 6.19% (91.5) 106.6 3.33% (10.8) 95.8 (27.9) 67.9 (56.0) 11.9 1,256.0 38.70% (1,051.2) 32.39% (0.6) - 204.2 6.29% (90.8) 113.4 3.49% (14.3) 99.1 (29.7) 69.4 (8.8) 60.6 vs. LY ($m) (44.0) +101.7 (63.7) (82.0) (35.6) +31.4 (0.6) (1.3) (6.1) (0.7) (6.8) +3.5 (3.3) +1.8 vs. LY (%) (1.4%) +17.0% (10.4%) (4.0%) (2.8%) (58bps) +3.0% +54bps (3.0%) (10bps) (0.8%) (6.0%) (16bps) +24.5% (3.3%) +6.1% (1.5) (2.2%) (47.2) (48.7) (80.4%) 2017 $m 372 30 (380) (282) 24 436 986 1,186 143 (30) 113 1,073 1,186 2016 $m 396 50 (400) (301) 24 421 1,020 1,210 147 (45) 102 1,108 1,210 DIRECTORS’ REPORT Continued CASH FLOW FOR THE PERIOD ENDED 29 JULY 2017 EBITDA* Working capital movement Operating cash flow Conversion Capex paid / acquisitions** Free cash flow Tax Interest Dividends Share Rights issue proceeds Net cash flow FY2017 FY2016 $m 183 4 187 102% (110) 77 (28) (10) (49) 0 (10) $m 196 (10) 186 95% (59) 127 (20) (16) (16) 212 287 * EBITDA includes implementation costs and individually significant items, with the exception of non-cash impairments and write-downs (store and support office assets, sass and bide, and Austradia) ** Net of Landlord contributions OTHER STATISTICS AND FINANCIAL RATIOS Return on Total Funds Employed(1) Gearing Net Debt/EBITDA(1) (1) Calculated on a rolling 12 months basis SHARES AND DIVIDENDS Shares on Issue Basic EPS(2) Dividend per share FY2017 FY2016 8.9% 9.5% 0.6x 9.1% 8.4% 0.5x FY2017 FY2016 821.3 million 821.3 million 8.3 cents 5.0 cents 8.8 cents 5.0 cents (2) Calculated on weighted average number of shares of 821.3 million (FY2016: 786.8 million) and based on NPAT pre implementation costs and individually significant items PROGRESS ON NEW MYER TARGET METRICS New Myer target metrics FY2017(3) Target average sales growth greater than 3% between 2016 – 2020 Average sales growth from July 2015 up 0.1% Target greater than 20% improvement in sales per square metre by 2020 Sales per square metre increased by 3.7% to $4,055 / m2 Target EBITDA growth ahead of sales growth by 2017 EBITDA down by 3.0% Sales down 1.4% Target Return on funds employed (ROFE) greater than 15% by 2020 ROFE 8.9% (3) FY2016 results are on a 52-week basis for comparison purposes. NON-IFRS FINANCIAL MEASURES The Company’s results are reported under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The Company discloses certain non-IFRS measures in this Directors’ Report, which can be reconciled to the Financial Statements as follows: Income Statement reconciliation $ millions Statutory reported result Add back: Implementation Costs and Individually Significant Items Restructuring and redundancy costs Store exit costs and other asset impairments Support office onerous lease expense and impairment of assets Underlying result EBIT 41.0 6.3 48.1 11.2 106.6 TAX (18.3) (1.9) (4.3) (3.4) (27.9) NPAT 11.9 4.4 43.8 7.8 67.9 31 DIRECTORS’ REPORT Continued FY2017 OPERATIONS The New Myer strategy is a five-year transformation agenda launched in September 2015. Myer has made significant progress to deliver New Myer which has assisted the Company to withstand the challenging retail trading conditions characterised by heightened competition, subdued consumer sentiment and discount fatigue. This result demonstrates that Myer has become a leaner, more productive and efficient retailer, better placed to compete in a rapidly changing environment. During FY2017 Myer made substantial progress across all aspects of our strategy. This included: > Daniel Bracken stepped down from his roles as Chief Merchandise and Customer Officer and Deputy CEO in July 2017. Gary Williams stepped down from his role as Chief Transformation Officer in December 2016. > Karen Brewster was appointed Executive General Manager Merchandise Buying and Damian Walton was appointed Executive General Manager Merchandise Planning in July 2017. Peter Mitchley-Hughes was appointed Head of Business Transformation in January 2017. Details of Myer’s executives are set out in the Executive Management Team section of Myer’s Investor Centre website. > In July 2017 Myer recognised an impairment charge of $38.8 million against the carrying value of the > Standout performance in our omni-channel and online business sass & bide business. with online sales up 41.1%; > Reduced store footprint resulting from store closures at Wollongong, Brookside and Orange, space handbacks at Cairns and Dubbo and at our Richlands Distribution Centre in Queensland; > In May 2017 voluntary administrators were appointed to the assets and undertakings of Austradia Pty Ltd (Austradia), the Australian rights holder of the TOPSHOP TOPMAN brands. Myer held a 20% interest in Austradia at the time of the appointment. As previously outlined, Myer has written down the full carrying > Handed back over 30% of our support office floorspace; value of its stake in Austradia of $6.8 million. > Launched cafes, pop up shops and an ice rink in our > In April 2017 Myer executed an asset sale deed with the Sydney store; > Partnered with Katy Perry in an innovative marketing campaign; > Introduced a dedicated clearance floor at our Frankston store; > Rolled out new and upgraded brand destinations as well as 73 upgraded Myer Exclusive Brands (MEB) master brand fitouts and dedicated service models for Basque, Piper and BLAQ; and > Introduced new wanted brands including Forever New, Roxy, Quicksilver, Darren Palmer Home and 2XU. To respond to the external environment we are rapidly evolving our strategy to shift emphasis in order to adapt to the changing operating environment. We will elevate as priorities: Administrators of Webster Holdings to acquire the brands, intellectual property, fixed assets and inventory of Marcs and David Lawrence. > In May 2017 we announced the hand back of approximately 50% of the space at the Richlands Distribution Centre in Queensland. > In March 2017 we announced the hand back of over 30% of the floor space at our Support Office at 800 Collins Street. > The Myer Wollongong store was exited in October 2016 and the Myer Brookside and Orange stores were exited in February 2017. 9. BUSINESS STRATEGIES AND FUTURE DEVELOPMENTS We remain committed to the execution of the New Myer strategy > investment in our omni-channel business and continuing in FY2018. In order to respond to persistent challenging conditions to drive omni-channel sales; and we are rapidly evolving our strategy. > our commitment to increase productivity and efficiency to ensure the resilience of our business. In addition to these achievements, sections 8 and 9 provide an outline of Myer’s developments and prospects. These should be read in conjunction with section 10, which describes factors which could impact Myer’s results. 8. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS IN FY2017 In addition to those matters described in section 7 above, the following significant changes occurred during FY2017: > A new director, JoAnne Stephenson was appointed to the Board of Myer Holdings Limited in November 2016. Her background, In FY2018 we will elevate as priorities investment in our omni- business and the pursuit of a leaner, more productive and efficient Myer. This will help us to withstand heightened competition. We will increase our emphasis on digital throughout the business. This will leverage the already strong growth in our omni-channel business and will enable us to build on our use of data to enable improvements in personalised and relevant marketing. We remain focused on a more innovative and experiential retail offer including services, food and new clearance floors, building on our achievements in FY2017. During FY2018 we will continue our wanted brands strategy, further rolling out brands such as Forever New, Quiksilver and Darren Palmer Home, as well as further developing our master experience and particular skills that she brings to the Board brand offering. are set out on page 27. 32 Myer Annual Report 2017 DIRECTORS’ REPORT Continued The Company has strong foundations from which to build and A significant event or issue could attract strong criticism of the we look forward to continuing to shift the business towards a Myer brand, which could impact sales or our share price. Myer has more effective, innovative and experiential retail model, which a range of policies and initiatives to mitigate brand risk, including is engaging and relevant to our customers. a Code of Conduct, a Whistleblower Policy, an Ethical Sourcing 10. KEY RISKS AND UNCERTAINTIES Policy, marketing campaigns, and ongoing environmental and sustainability initiatives. The Group’s strategies take into account the expected operating PEOPLE MANAGEMENT RISKS and retail market conditions, together with general economic conditions, which are inherently uncertain. Safety is a high priority at Myer to ensure the wellbeing of all of our team members, customers, and suppliers. Failure to manage The Group has structured proactive risk management framework health and safety risks could have a negative effect on Myer’s and internal control systems in place to manage material risks. The reputation and performance. We conduct regular detailed risk key risks and uncertainties that may have an effect on the Group’s assessments at each store, distribution centre, and at our support ability to execute its business strategies and the Group’s future office, as well as regular education sessions. growth prospects and how the Group manages these risks are set out below. EXTERNAL RISKS Macro-economic factors such as the fluctuation of the Australian dollar and interest rates; poor consumer confidence; changes in government policies; external, natural or unforeseen events, such as an act of terrorism or national strike; and weakness in the Myer needs to attract and retain talented senior managers to ensure that our leadership team has the right skills and experience to deliver our strategy. Failure to do so may adversely affect Myer’s reputation, performance, and growth. During the year, we made a number of new appointments to our Executive Management Group, and we provided our team members with access to training and development to further develop their skills. global economy could adversely impact the Company’s ability to STRATEGIC AND BUSINESS PLAN RISKS achieve sales growth. Myer regularly analyses and uses economic and available data to help mitigate the future impact on sales, and has also implemented conservative hedging, capital management, and marketing and merchandise initiatives to combat the cyclical nature of the business. COMPETITIVE LANDSCAPE RISKS The Australian retail industry in which Myer operates remains highly competitive. The Company’s competitive position may be negatively impacted by new entrants to the market, existing competitors, changes to consumer demographics and increased online competition, which could impact sales. To mitigate these risks, Myer continues to implement our new strategy which is guided by our detailed customer insights and a focus on providing a customer led offer, wonderful experiences, and omni-channel shopping. Myer also continues to select optimal merchandise A failure to deliver our strategic plan could impact sales, share price, and our reputation. Our strategic plan is guided by our detailed external and internal customer insights and is being implemented through three phases – mobilising the business for transformation; resetting the business; and delivering New Myer. REGULATORY RISKS From time to time, Myer may be subject to regulatory investigations and disputes, including by the Australian Taxation Office (ATO), Federal or State regulatory bodies including the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC), and the Australian Securities Exchange (ASX). The outcome of any such investigations or disputes may have a material adverse effect on Myer’s operating and financial performance. assortment with the right categories and brands. LITIGATION TECHNOLOGY RISKS, INCLUDING CYBER SECURITY With Myer’s increasing reliance on technology in a rapidly changing digital environment, there is a risk that the malfunction of IT systems, outdated IT infrastructure, or a cyber-security violation could have a detrimental effect on our sales, business efficiencies, and brand reputation. To offset these risks, Myer continues to invest and develop our in-house technology capabilities and engage with reputable third-party IT service providers to ensure that we have reliable IT systems and issue management processes in place. On 25 March 2015, legal proceedings were served against Myer by a shareholder, Melbourne City Investments Pty Ltd (MCI), seeking to bring a group action for itself and on behalf of a defined (but unnamed) group of shareholders in the Supreme Court of Victoria. The writ was filed on behalf of MCI by Portfolio Law Pty Ltd. MCI alleges loss and damage said to have resulted from a statement made in the context of Myer’s full year FY2014 results. In December 2016 the Supreme Court of Victoria held that these proceedings were an abuse of process and ordered they be permanently stayed. In July 2017 the Court of Appeal unanimously refused MCI’s appeal from the Supreme Court’s decision. This means that MCI BRAND REPUTATION RISKS may not continue the proceeding against Myer. Myer’s strong brand reputation is crucial for building positive On 23 December 2016 legal proceedings were served against Myer relationships with customers, suppliers and contractors which by Perpetual Limited and Bridgehead Pty Ltd, the landlords of the in turn generates sales and goodwill towards the Company. Myer Chadstone store. The landlords allege that there was a mutual 33 DIRECTORS’ REPORT Continued mistake in the drafting of the variable outgoings provisions in the The Board has determined a final dividend of 2.0 cents lease for the Myer Chadstone store or that those provisions have per share to be paid on 9 November 2017 (with a Record been misinterpreted. The landlords seek, among other things, Date of 28 September 2017). rectification of the lease and payment of alleged unpaid outgoings in respect of the period FY00/01 to FY15/16 in the aggregate amount of $19.14 million plus GST, as well as interest and costs. Myer believes that the claim has no proper basis, denies any liability under it and will vigorously defend it. On 30 December 2016 proceedings were served against Myer by a former shareholder, TPT Patrol Pty Ltd as trustee for the Amies Superannuation Fund (TPT Patrol), bringing a group action for itself and on behalf of a defined (but unnamed) group of shareholders (being the same group as in the MCI proceeding referred to above) in the Federal Court. As with the MCI proceeding, these proceedings were filed on behalf of TPT Patrol by Portfolio Law Pty Ltd. TPT Patrol alleges loss and damage said to have resulted from statements made in the context of Myer’s full year FY2014 results. The claim is, in substance, identical to the claim in the This takes the FY2017 dividend to 5.0 cents per share. Further information regarding dividends is set out in the Financial Statements (at note F3). 13. PERFORMANCE RIGHTS GRANTED OVER UNISSUED SHARES The Myer Long Term Incentive Plan (LTIP) operates for selected senior executives and has been in operation since December 2006. Under the LTIP, the Company has granted eligible executives performance rights over unissued ordinary shares of the Company, subject to certain vesting conditions. Shares delivered to senior executives as a result of the vesting of performance rights can be either issued as new shares or purchased on market. MCI proceeding. Myer believes the TPT Patrol claim has no proper basis, denies any liability under it and will vigorously defend it. Each performance right entitles the holder to acquire one ordinary fully paid share in the Company (subject to the adjustments Given the above, no provisions have been recognised at 29 July 2017 in respect of the MCI, Chadstone or TPT Patrol disputes. 11. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR Anne Brennan has notified the Board that she does not intend to seek re-election as a director of the Board at this year’s AGM.* On 14 September 2017 it was announced that Myer will not be renewing the leases at Colonnades, Belconnen and Hornsby. outlined below). Since 2011, only performance rights were granted under the LTIP. During the financial year, the Company granted 808,443 performance rights to the CEO under the FY2017 LTIP (CEO Offer); and 3,791,811 performance rights were granted to other selected senior executives under the LTIP (LTIP Offer); totalling 4,600,254 performance rights granted. The performance rights granted under each offer are subject to different performance conditions. No performance rights have been granted since the end of the In September 2017 the Company rolled out its clearance floors financial year ended 29 July 2017. across seven more stores in addition to Frankston and a dedicated presence online at myer.com.au. No other 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, and which has significantly affected, or may significantly affect: (a) the Group’s operations in future financial years; (b) the results of those operations in future financial years; or (c) the Group’s state of affairs in future financial years. 12. DIVIDENDS Myer paid a final dividend of 3.0 cents per share for the full year FY2016 on 10 November 2016 (with a Record Date of 29 September 2016), totalling $24.6 million. Myer paid an interim dividend of 3.0 cents per share, fully franked, on 4 May 2017 (with a Record Date of 27 March 2017), totalling $24.6 million. A prior grant of 226,833 performance rights to senior executives made on 27 November 2013 expired on 31 October 2016. On 15 December 2016, a total of 28,355 performance rights granted under the LTIP in FY2014 vested, and 28,355 fully paid ordinary shares in the Company were issued to participants. The table below sets out the details of performance rights that have been granted under the LTIP Offer and the CEO Offer and which remain on issue as at the date of this Directors’ Report. A holder of a performance right may only participate in new issues of securities of the Company if the performance right has been exercised, participation is permitted by its terms, and the shares in respect of the performance rights have been allocated and transferred to the performance right holder before the Record Date for determining entitlements to the new issue. Further information about performance rights issued under the LTIP (including the performance conditions attached to the performance rights granted under the LTIP Offer, and the performance rights granted to the Key Management Personal of the Company) is included in the Remuneration Report. * On 19 September 2017 it was announced that Garry Hounsell would join Myer as a non-executive Director and Deputy Chairman. On 11 October 2017 it was announced that Paul McClintock AO would retire at Myer’s 2017 AGM and that Garry Hounsell would become Chairman of the Company effective from the end of the AGM. On 17 October 2017 it was announced that Julie Ann Morrison would join Myer as a non-executive Director. 34 Myer Annual Report 2017 DIRECTORS’ REPORT Continued Date performance rights granted 15 December 2014 (grant to CEO under the CEO Offer which is retained on departure) 15 December 2014 (grant senior executives under the LTIP offer)) 5 January 2016 (grant to CEO under the CEO Offer) 5 January 2016 (grant to senior executives under the LTIP Offer) 22 December 2016 (grant to CEO under the CEO Offer) 22 December 2016 (grant to senior executives under the LTIP offer) Closing balance Number of performance rights remaining Expiry date Issue price on issue* 31-Oct-17 31-Oct-17 31-Oct-20 31-Oct-20 31-Oct-19 31-Oct-19 nil nil nil nil nil nil 568,749 1,282,165 939,130 3,268,471 808,443 3,663,808 10,530,766 * Each performance right entitles the holder to receive one fully paid ordinary share in the Company, subject to the satisfaction of the relevant performance outcomes. The number of performance rights that a holder is entitled to receive on the exercise of a performance right may also be adjusted in a manner consistent with the ASX Listing Rules if there is a pro-rata issue of shares or a reconstruction of the capital of the Company. 14. SHARES ISSUED UPON VESTING OF PERFORMANCE RIGHTS 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 From time to time, the Company issues fully paid ordinary shares in directors of the Company which provide indemnities against losses the Company to the Myer Equity Plans Trust (Trust) for the purpose incurred in their role as directors, subject to certain exclusions, of meeting anticipated exercises of securities granted under the including to the extent that such indemnity is prohibited by the LTIP. To calculate the issue price of shares issued to the Trust, the Corporations Act 2001 (Cth) or any other applicable law. The deeds Company uses the five-day volume weighted average price of the stipulate that the Company will meet the full amount of any such Company’s shares as at the close of trading on the date of issue. liabilities, costs and expenses (including legal fees). During the period ended 29 July 2017, 150,000 fully paid ordinary During the financial year, the Company paid insurance premiums shares were purchased on market by the Trust and 28,355 shares for a directors’ and officers’ liability insurance contract that were transferred from the Trust for performance rights issued provides cover for the current and former directors, alternate under the LTIP in 2014 (vested 15 December 2016) and 114,617 directors, secretaries, executive officers and officers of the shares were transferred from the Trust under the short term Company and its subsidiaries. The directors have not included incentive plan. Since 29 July 2017, no shares have been issued to or details of the nature of the liabilities covered in this contract or otherwise acquired by the Trust, and no fully paid ordinary shares the amount of the premium paid, as disclosure is prohibited under of the Company held by the Trust were transferred to participants the terms of the contract. in the LTIP. 15. REMUNERATION REPORT The Group’s auditor is PricewaterhouseCoopers (PwC). No payment has been made to indemnify PwC during or since the financial year end. No premium has been paid by the Group in The Remuneration Report, which forms part of this Directors’ respect of any insurance for PwC. No officers of the Group were Report, is presented separately from page 38. partners or directors of PwC whilst PwC conducted audits of 16. INDEMNIFICATION AND INSURANCE OF DIRECTORS, OFFICERS AND AUDITORS 17. PROCEEDINGS ON BEHALF OF THE COMPANY the Group. The Company’s Constitution requires the Company to indemnify No person has applied to the court under section 237 of the 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 the law against all liabilities 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 incurred as an officer of the Group, except to the extent covered behalf of the Company for all or part of those proceedings. 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. No proceedings have been brought or intervened in on behalf of the Company with the leave of the court under section 237 of the Corporations Act 2001. 35 DIRECTORS’ REPORT Continued 18. ENVIRONMENTAL REGULATION 20. AUDITOR’S INDEPENDENCE DECLARATION The Group is subject to and has complied with the reporting and A copy of the auditor’s independence declaration as required compliance requirements of the National Greenhouse and Energy under section 307C of the Corporations Act 2001 is attached to this Reporting Act 2007 (Cth) (NGER Act). Directors’ Report. The NGER Act requires the Group to report its annual greenhouse 21. ROUNDING OF AMOUNTS gas emissions and energy use. The Group has implemented systems and processes for the collection and calculation of The Company is of a kind referred to in ASIC Corporations the data required. In compliance with the NGER Act, the Group (Rounding in Financial/Directors’ Reports) Instrument 2016/191 submitted its eighth report to the Clean Energy Regulator relating to the ‘rounding off’ of amounts in the Directors’ Report in October 2016 and is due to submit its ninth report by and, in accordance with that instrument, amounts in the Directors’ 31 October 2017. No significant environmental incidents have been reported Report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. internally, and no breaches have been notified to the Group 22. ANNUAL GENERAL MEETING by any government agency. The Group is a signatory to the Australian Packaging Covenant, which is a national co-regulatory initiative in place of state-based The Annual General Meeting of the Company will be held on Friday 24 November 2017. regulatory arrangements for sustainable packaging management. The Directors’ Report is made in accordance with a resolution of Members are required to adhere to the covenant commitments, directors. which include development and implementation of an action plan and report annually on progress. Myer submitted its 10th annual report in March 2017. 19. NON-AUDIT SERVICES The Company may decide to employ its external auditor on assignments additional to its statutory audit duties where the Paul McClintock AO Chairman Melbourne, 13 September 2017 auditor’s expertise and experience with the Company and/or CORPORATE GOVERNANCE STATEMENT To view our Corporate Governance Statement please visit myer.com.au/investor. 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 Statements (at note H5). The Board 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 the 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 that 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. 36 Myer Annual Report 2017 AUDI TOR’S INDEPENDE NC E Auditor’s Independence Declaration DECLARATION As lead auditor for the audit of Myer Holdings Limited for the year ended 29 July 2017, 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. Auditor’s Independence Declaration As lead auditor for the audit of Myer Holdings Limited for the year ended 29 July 2017, I declare that to the best of my knowledge and belief, there have been: (a) Jason Perry Partner (b) PricewaterhouseCoopers no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and Melbourne no contraventions of any applicable code of professional conduct in relation to the audit. 13 September 2017 This declaration is in respect of Myer Holdings Limited and the entities it controlled during the period. Jason Perry Partner PricewaterhouseCoopers Melbourne 13 September 2017 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, 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. 37 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, 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. REMUNERATION REPORT Dear Shareholders, On behalf of the Board, we are pleased to present Myer’s FY2017 Remuneration Report. BUSINESS PERFORMANCE We have made significant progress in the delivery of New Myer during FY2017, although we have also been challenged by the difficult market conditions impacting the retail sector. Our Net Profit After Tax (NPAT) result of $67.9 million (pre-implementation costs and individually significant items), while short of our target to exceed last year’s NPAT of $69.3 million, has been delivered against a backdrop of increasing competition, subdued consumer sentiment and discount fatigue. While we are disappointed to have not reached our target of exceeding last year’s NPAT, this result demonstrates that Myer has become a leaner, more productive and efficient retailer, and is better placed to compete in a rapidly changing environment. As the retail industry evolves, so too must Myer. Our commitment to shareholders remains unchanged - we remain dedicated to evolving into a fashion-forward retailer built on a customer-led offer, wonderful experiences and connected retail and delivered through increased productivity and efficiency. Our Executive Management Group (EMG) is highly capable and possesses a depth of experience across retail, digital, marketing and other key areas that are critical to the delivery of our strategy. This experience, and the ability of our executives to meet challenging business objectives in a constantly changing market, will be essential to our delivery of sustainable earnings growth. Attracting and retaining the talent we need to deliver New Myer remains a critical priority for the Board. We therefore regularly review the remuneration framework to ensure that it appropriately balances shareholder outcomes, executive performance and our ability to attract and retain talent. The new demands on our industry and our business, particularly in regards to attraction and retention, require new and flexible approaches to remuneration. We expect that this will result in continued upward pressure on both fixed and at-risk remuneration as we look to other sectors, both locally and internationally, for the capability we need for the future. EXECUTIVE REMUNERATION OUTCOMES The NPAT gateway condition, which requires a minimum level of NPAT to be achieved before any Short Term Incentive (STI) can be awarded, was not met in respect of the FY2017 STI, and accordingly no STI was paid to Executives, including Key Management Personnel (KMP). Performance rights granted to KMP under the FY2014 Long Term Incentive Plan (LTIP) were tested for vesting following the release of our results in September 2016. The relative Total Shareholder Return (TSR) and Earnings per Share (EPS) hurdles under this plan were not met, and accordingly the rights subject to these hurdles did not vest. The Business Transformation hurdle set in 2014 was determined by the Board to be partially met, and accordingly, 50 percent of the rights subject to this hurdle (being 12.5 percent of the maximum grant) vested. The measures that were achieved included retention of Myer One customers; Net Promoter Score; 38 Myer Annual Report 2017 sales per square metre; increase in basket size (online sales); and increase in page views. There was only one KMP who participated in the FY2014 LTIP and therefore had rights vested under this plan. Performance rights granted to KMP under the FY2015 LTIP will be tested for vesting following the release of our financial results in September 2017, against the EPS, relative TSR and Business Transformation hurdles. Any vesting will be disclosed in our FY2018 remuneration report. The Board considers these remuneration outcomes to be reflective of shareholder outcomes. CHANGES TO THE FY2017 REMUNERATION FRAMEWORK This year, the Board made minor adjustments to the remuneration framework to ensure its continued alignment with strategy and performance. In regards to the STI, we have maintained the NPAT gateway, meaning that no STI awards are paid unless a minimum acceptable level of NPAT is achieved. If the gateway is achieved, the NPAT result is assessed as part of a performance ‘scorecard’. In the scorecard, we balance the emphasis between key financial and strategic objectives that combine to drive our strategy and deliver the NPAT result. In relation to the LTIP, in FY2017 we have moved away from what was considered a ‘one-off’ transformation LTIP towards a design that reflects the ongoing nature of our business evolution, beyond the initial five year transformation period. The performance hurdles under the revised LTIP are intended to focus participants on the strategy fundamentals of improving earnings and return on funds; align to shareholders through Total Shareholder Return (TSR); and complement the measures in the STI. The result is a remuneration framework that is closely aligned to the creation of shareholder value. Both the STI and the LTIP include ambitious performance hurdles set to align with the ongoing evolution of the business. Having regard to the prevailing economic and industry conditions, and the competitiveness of current remuneration levels, the Board has determined not to increase Total Fixed Remuneration for the CEO in FY2017. There has been no change to his fixed remuneration since his appointment in March 2015. We hope that you find the Myer Remuneration Report clearly outlines the links between our strategy, our performance, and executive remuneration outcomes. We look forward to your continued support at our Annual General Meeting in November 2017, and welcome any feedback on our remuneration practices and disclosures. Yours faithfully, Paul McClintock, AO Chairman Chris Froggatt Chairman, Human Resources and Remuneration Committee REMUNER ATION REPORT Continued CONTENTS 2. REMUNERATION STRATEGY Section 1 Introduction Section 2 Remuneration Strategy The remuneration strategy defines the direction for Myer’s reward framework and policies, and drives the design and application of Section 3 Company performance and remuneration programs for all senior managers in the Company, including KMP. outcomes for FY2017 Myer’s remuneration strategy is to: Section 4 Changes to remuneration frameworks in FY2017 Section 5 Remuneration governance Section 6 Executive remuneration Section 7 Remuneration outcomes for executive KMP Section 8 Executive service agreements Section 9 Equity Section 10 Loans Attract and retain high calibre executives > Reward competitively in the markets in which Myer competes for talent > Remuneration is flexible enough to respond to the changing talent and capability requirements of the retail industry Section 11 Dealing in securities > Provide a balance of fixed and ‘at risk’ remuneration Section 12 Non-executive director remuneration 1. INTRODUCTION Align executive rewards with Myer’s performance > Align reward outcomes with long term shareholder value The Directors of Myer Holdings Limited (the Company) present creation the Remuneration Report for the financial year ended 29 July > Assess rewards against objective financial and non-financial 2017 prepared in accordance with the requirements of the measures Corporations Act 2001 and its regulations. > Include at risk components based on both short and long term This report outlines the remuneration strategy, framework and performance other conditions of employment for the KMP, and details the role > Remunerate or reward based on performance and accountabilities of the Board and relevant Committees that support the Board on these matters. In this report, ‘executives’ refers to those members of the Executive Management Team who have been identified as KMP. In FY2017 the Board reviewed the remuneration frameworks and made some changes to ensure that they continue to effectively meet the Company’s strategic objectives. These changes are detailed in Section 4: Changes to Remuneration Frameworks in The information provided within this report has been audited FY2017. as required by section 308(3C) of the Corporations Act 2001 and forms part of the Directors’ Report. The table below details the Company’s KMP during the 2017 financial year. The table overleaf summarises the remuneration framework and objectives for FY2017. Name Non-Executive Directors Role P McClintock A Brennan I Cornell C Froggatt J Stephenson(1) R Thorn D Whittle Executive Directors R Umbers Chairman, Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Chief Executive Officer and Managing Director Executive Key Management Personnel D Bracken(2) G Devonport A Sutton Deputy Chief Executive Officer and Chief Merchandise and Customer Officer Chief Financial Officer Executive General Manager Stores (1) Ms Stephenson was appointed as a Director on 28 November 2016. (2) Mr Bracken stepped down as a KMP on 19 July 2017 and is currently serving out his notice period in-line with his contractual obligations. 39 REMUNER ATION REPORT Continued STRATEGIC OBJECTIVES & PERFORMANCE LINK PERFORMANCE MEASURES AT-RISK WEIGHT TOTAL FIXED COMPENSATION (TFC) > To attract and retain high calibre executives > Varies based on employee’s experience, > Provides ‘predictable’ base level of reward skills and performance > Set with reference to market using external benchmark data > Consideration given to both internal and - external relativities across retail and other relevant sectors > Designed to drive the short term financial and strategic objectives of the Company, which are designed to translate to shareholder return > NPAT ‘gateway’ – minimum threshold performance level below which no STI is paid > Once gateway is achieved, the NPAT result is assessed as part of a ‘performance scorecard’ > An NPAT gateway ensures a minimum and accounts for 60% of the maximum STI acceptable level of Company profit before executives receive any STI award > Key financial and strategic objectives aligned to the strategy account for 40% of the maximum > Supports retention and encourages STI. Measures for FY2017 included: CEO: Maximum 80% of TFC Other executive KMP: Maximum 60% of TFC SHORT TERM INCENTIVE executives to maintain focus on long term value in addition to annual results, through a deferred component - Cost Of Doing Business; - Cash conversion; - Store footprint reduction; and - Safety performance. > Delivered in equity to align executives with > Performance measures: LONG TERM INCENTIVE shareholder interests > Focused on delivery of long term business strategy and outcomes > Measures are aligned with the Company ‘Metrics that Matter’ > Measures complement those in the STI to provide a holistic and aligned reward offer > Performance Period beyond the initial transformation period and reflecting the evolution of the business, to drive ongoing performance and support the retention of key executives - Return on Funds Employed (50% of award) - EPS growth (25% of award) - Relative TSR (25% of award) > Performance measured over a 3 year Performance Period (FY2017 – FY2019) > Shares provided on vesting subject to restriction for 1 year CEO: 90% of TFC Other executive KMP: Between 60% and 90% of TFC TOTAL REMUNERATION Overall, the total remuneration mix is designed to attract, retain and motivate capable executives and drive delivery of the transformation strategy and ongoing business evolution, to deliver superior shareholder returns over the short and long term, while aligning executive remuneration outcomes with the experience of shareholders. 40 Myer Annual Report 2017 REMUNER ATION REPORT Continued 3. COMPANY PERFORMANCE AND REMUNERATION OUTCOMES FOR FY2017 3.1 COMPANY PERFORMANCE The Company’s remuneration structure aligns executive remuneration with shareholder interests over the short and long term and provides an appropriate reward on delivering our strategy. During FY2017 Myer made substantial progress across all aspects of our strategy. This included: > Standout performance in our omni-channel and online business with sales up 41.1%; > Reduced store footprint resulting from store closures at Wollongong, Brookside and Orange, space hand backs at Cairns and Dubbo and at Richlands Distribution Centre in Queensland; > Handed back over 30% of our support office floorspace; > Launched cafes, pop up shops and an ice rink in our Sydney store and partnered with Katy Perry in an innovative marketing campaign; > Introduced a dedicated clearance floor at our Frankston store; > Rolled out new and upgraded brand destinations as well as 73 upgraded MEB master brand fitouts and dedicated service models for Basque, Piper and BLAQ; and > Introduced new wanted brands including Forever New, Roxy, Quicksilver, Darren Palmer, Home and 2XU. The table below presents the Company’s annual performance against key financial metrics since 2013. Basic EPS (cents) NPAT before individually significant items ($m) NPAT after individually significant items ($m) Dividends (cents per share) Share price at beginning of year ($) Share price at end of year ($) Market capitalisation ($m) FY2013 FY2014 FY2015 FY2016(1) FY2017 21.8 127.2 127.2 18.0 1.83 2.66 16.8 98.5 98.5 14.5 2.66 2.24 13.2 77.5 29.8 7.0 2.24 1.18 1,552.4 1,311.9 694.0 8.8(2) 69.3 60.5 5.0 1.18(3) 1.34(4) 1,100.5 8.3(2)  67.9  11.9  5.0 1.34  0.77  632.4 (1) FY2016 results were impacted by the fully underwritten accelerated pro rata non-renounceable Entitlement Offer completed by the Company in September 2015. The Entitlement Offer resulted in the issue of 234,661,660 new shares at $0.94 per share. (2) FY2015, FY2016 and FY2017 Basic EPS exclude Individually Significant Items. (3) Share price before the Entitlement Offer completed in September 2015. (4) Share price after the Entitlement Offer completed in September 2015. 3.2 REMUNERATION OUTCOMES Total Fixed Compensation FY2017 Outcomes A review of Total Fixed Compensation (TFC) for KMP, including the CEO, was undertaken by the Human Resources and Remuneration Committee in the 2017 financial year. Only one adjustment was made at this time, being a 7.4 percent increase to TFC for Mr Devonport effective 20 July 2017, in recognition of his increased responsibilities for both Strategy and Business Development across the business. No further increases to TFC were made for KMP during FY2017, as the Board believes that KMP remuneration is appropriately positioned against the comparator market. There has been no increase to the CEO’s fixed remuneration since his appointment in FY2015. Short Term Incentive FY2017 Outcomes The net profit gateway condition, which requires a minimum level of NPAT to be achieved before STI can be awarded, was not met in respect of the FY2017 STI. Accordingly, no STI was payable to any participants. Individual performance objectives for the Executive Management Team are based on a range of financial and strategic measures linked to the metrics that matter and strategic priorities, which combined deliver the business strategy. The following STI objectives were achieved in FY2017, and, had the gateway been achieved, payment would have been made in respect of these measures: > Reduction in Cost of Doing Business as a percentage of sales; > Cash conversion; > Reduction in store footprint; > Lost Time Injury Frequency Rate (LTIFR). 41 REMUNER ATION REPORT Continued Long Term Incentive FY2017 Outcomes FY2014 LTIP (granted in November 2013) As noted in the FY2016 remuneration report, the performance rights granted to executives in November 2013 were tested against the EPS, relative TSR and Business Transformation hurdles following the release of our financial results in September 2016. The hurdles for EPS and relative TSR were not met and accordingly the rights subject to these performance hurdles lapsed. The performance rights subject to the Business Transformation hurdle were assessed and determined by the Board to have been partially met, and accordingly, 50 percent of these rights vested, being 12.5 percent of the total number of rights granted. The Business Transformation measures compare Myer’s actual performance against the target performance for the Business Transformation Hurdle metrics set out in Myer’s business plan, and were set to measure the way in which the Company is transforming in a time of continued structural realignment of the retail industry. The assessed level of performance for the Business Transformation hurdle for the period 28 July 2013 to 30 July 2016 under the FY2014 LTIP is shown below: Measure Loyalty Hurdle Achieved Performance > Improved retention of MYER one customers  Increased total number of premium & (premium & platinum members) platinum members by more than 50% > Increased MYER one sales as a percentage of business sales Customer Service > Net Promoter Score > Customer conversion rate Space Optimisation > Target sales per square metre > Target profit per square metre Merchandise > Mix of wholesale, MEB and concession sales > Target Operating Gross Profit Omni-Channel > Increase in basket size > Increase in number of page views FY2015 LTIP (granted in December 2014)          - NPS improvement greater than 20% - Increased by 8.1% - - - Increased by more than 15% Increased by more than 150% Performance rights granted to KMP in December 2014 under the FY2015 LTIP will be tested for vesting following the release of the Company’s financial results in September 2017, against the EPS, relative TSR and Business Transformation hurdles. Full details of performance against the hurdles and any vesting will be reported in the Company’s FY2018 remuneration report. 42 Myer Annual Report 2017 REMUNER ATION REPORT Continued 3.3 TAKE-HOME PAY The table below sets out the actual remuneration earned by KMP in FY2017. The table has not been prepared in accordance with accounting standards but has been provided to clearly outline the remuneration outcomes for Executive KMP. Remuneration outcomes prepared in accordance with the accounting standards are provided in Section 7. A review of TFC for KMP, including the CEO, was undertaken by the Human Resources and Remuneration Committee in the 2017 financial year. Only one adjustment was made at this time, being a 7.4 percent increase to TFC for Mr Devonport effective 20 July 2017, in recognition of his increased responsibilities for both Strategy and Business Development across the business. No further increases to TFC were made for KMP during FY2017, as the Board believes that KMP remuneration is appropriately positioned against the comparator market. There has been no increase to the CEO’s fixed remuneration since his appointment in FY2015. Short Term Incentive Long Term Incentive   Cash salary(1) Super- annuation(2) FY2016 STI(3) STI deferred from prior year Vested LTIP(4) Actual FY2017 Remuneration 2017 2017 2017 2017 1,180,384 19,616 224,793 1,030,937 857,190 640,384 20,650 19,616 19,616 136,252 125,708 96,349 - - - - - - - 15,269 1,424,793 1,187,839 1,002,514 771,618 Name Executive Directors R Umbers Executive KMP D Bracken(5) G Devonport A Sutton (1) Cash salary includes short term compensated absences and any salary sacrifice arrangement implemented by the Executives, including additional superannuation contributions. (2) Executives receive a statutory superannuation contribution up to a threshold limit in line with the ATO published maximum superannuation contribution base. (3) STI payments relating to FY2016 performance and conditions, but paid during FY2017. Includes only the non-deferred component. (4) The number of performance rights vesting under the FY2014 LTIP multiplied by the Myer share price at vesting (calculation assumes a share price of $1.37). (5) Mr Bracken stepped down as a KMP on 19 July 2017. 43                                     REMUNER ATION REPORT Continued 4. CHANGES TO REMUNERATION FRAMEWORKS IN FY2017 Short term incentive plan Changes in FY2017 Following a review of the remuneration framework, the Board approved some changes to the design of the STI plan applicable to KMP in FY2017. These changes are outlined below, with additional detail provided in Section 6.2. Weighting of Performance Measures Once the gateway is achieved, a scorecard is assessed to determine individual awards under the STI plan. The NPAT result forms part of the scorecard, which balances the emphasis between the key financial and strategic objectives that together combine to drive our strategy. The NPAT measure accounts for 60 percent of the scorecard for KMP in FY2017, a reduction from 80 percent in FY16. Performance against other financial and strategic objectives linked to the metrics that matter and strategic priorities determine the remaining 40 percent of the scorecard. The Board has determined that this change maintains the importance of NPAT in determining any payout to participants, whilst allowing sufficient weighting to be placed on other measures linked to the achievement of transformation objectives. Long term incentive plan Changes in FY2017 The Board has reviewed the structure of the LTIP for FY2017 and made amendments to key design features as planned, to revert from what was considered a ‘one-off’ transformation LTIP towards a design that reflects the ongoing nature of our business evolution, beyond the initial five year transformation period. The prior year LTIP (FY2016 LTIP) comprised an initial award (Initial Award) of performance rights subject to Return on Funds Employed (ROFE) and sales per square metre hurdles. If these hurdles are achieved and the Initial Award vests, an additional award of performance rights (Additional Award) is awarded, equal to 50 percent of the number of Initial Award performance rights vested, and subject to a relative TSR and an EPS hurdle. Together, the two components of the FY2016 LTIP have a five year Performance Period in total, in line with the delivery of the initial transformation program. The changes to the LTIP for the FY2017 plan year are outlined below, with additional detail provided in Section 6.3. Shareholders approved the grant of performance rights to the CEO under the new plan design at the Company’s FY2016 Annual General Meeting. Awards under this plan have also been made to other members of the Executive Management Team and incumbents in key strategic roles in the Company. FY2017 LTIP An award of performance rights with three performance hurdles, designed to reflect long-term business performance: > 50 percent of the award is subject to growth in Return on Funds Employed (ROFE) over the Performance Period (ROFE hurdle) > 25 percent of the award is subject to compound annual growth in Earnings per Share over the Performance Period (EPS hurdle) > 25 percent of the award is based on the Company’s Total Shareholder Return relative to an agreed peer group (TSR hurdle) The Performance Period is three years. Any shares provided on vesting of the performance rights will be subject to a restriction period of 12 months post vesting. The hurdles for the FY2017 LTIP have been chosen to align with shareholder returns and the delivery of shareholder value over the Performance Period. A more detailed explanation of why the hurdles were chosen is included in Section 6.3. 44 Myer Annual Report 2017 REMUNER ATION REPORT Continued 5. REMUNERATION GOVERNANCE 5.2 USE OF REMUNERATION CONSULTANTS 5.1 ROLE OF THE HUMAN RESOURCES AND REMUNERATION COMMITTEE To ensure it is fully informed when making remuneration decisions, the Committee draws on services from a range of external sources, including remuneration consultants where appropriate. The The Board reviews its role, responsibilities, and performance Company’s guidelines on the use of remuneration consultants aim annually to ensure that the Company continues to maintain and to ensure the independence of remuneration consultants from improve its governance standards. Myer’s management, and include the process for the selection of The Board is responsible for ensuring the Company’s remuneration consultants and the terms of engagement. strategy is equitable and aligned with Company performance and Remuneration consultants are engaged by the Committee shareholder interests. The Board conducts an annual review of Chairman, and report directly to the Committee. As part of this the remuneration strategy of the business. To assist with this, the engagement, an agreed set of protocols to be followed by the Board has established a Human Resources and Remuneration consultants, the Committee, and management, have been devised Committee (Committee) made up of non-executive directors only. that determine the way in which remuneration recommendations The Committee charter is available on the Company’s Investor are developed and provided to the Board. This process is intended to ensure that any recommendation made by the remuneration consultant is free from undue influence by the KMP to whom any recommendations may relate. During FY2017 the Board continued to engage Ernst & Young (EY) to provide various remuneration advice, including benchmarking data, market commentary and professional guidance regarding Myer’s executive remuneration and incentive plans. During this engagement no remuneration recommendations as defined by the Corporations Act 2001 were provided to the Company by EY. Centre website. When making remuneration decisions, the Committee will also give consideration to the Company’s internal succession plan and capability profile. Ms Chris Froggatt chairs the Committee. Other members of the Committee are Ms Anne Brennan and Mr Ian Cornell. In performing its role, the Committee has the responsibility to make recommendations to the Board on: > non-executive director fees; > executive remuneration (for the Managing Director and CEO and other executives) including specific recommendations on remuneration packages and other terms of employment; > the overarching remuneration framework including the policy, strategy and practices for fixed reward and both short and long term incentive plans and performance hurdles; and > the health of the organisation, succession coverage and strength, organisational culture and diversity. The Committee has been established under rule 8.15 of the Constitution of the Company. Further information on the role of the Committee, its membership and meetings held throughout the year will be set out in the Corporate Governance Statement (available on the Company’s website) and the Directors’ Report. The Chairman, the CEO, and the Head of the Human Resources function are regular attendees at the Committee meetings. The CEO was not present during any Committee or Board meetings when his remuneration was considered or discussed during the financial year. 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 Chairman or if she is not available, a Committee member, will attend the Annual General Meeting and be available to answer any questions from shareholders about the Committee’s activities or, if appropriate, the Company’s remuneration arrangements. 45 REMUNER ATION REPORT Continued 6. EXECUTIVE REMUNERATION Remuneration for executives is delivered through a mix of fixed and variable (or ‘at risk’) pay, and a blend of short and longer term incentives. As executives gain seniority within the Company, the balance of this mix shifts to a higher proportion of ‘at risk’ pay. As outlined in the table in Section 2: Remuneration Framework, executive remuneration is made up of three components: > TFC – base pay and benefits, including superannuation; > STI; and > LTI. The combination of these components comprises an executive’s total remuneration. The chart below shows the relative weighting of each component, as a proportion of the total potential remuneration for KMP, for the 2017 financial year: Chief Executive Officer & Managing Director 37% 15% 15% 33% Deputy CEO & Chief Merchandise and Customer Officer 40% 12% 12% 36% Chief Financial officer 40% 12% 12% 36% Executive General Manager Stores 45% 14% 14% 27% TFC STI STI (deferred) LTI 6.1 TOTAL FIXED COMPENSATION TFC provides the base level of reward and is set at a level to attract and retain high calibre executives. Features of Total Fixed Compensation What is included TFC is structured as a total fixed remuneration package, made up of base salary, superannuation, other benefits and in TFC? Fringe Benefits Tax, where applicable. Some of the benefits include the opportunity to receive a portion of their How is TFC reviewed? fixed remuneration in a variety of forms, including fringe benefits such as motor vehicles, or to make additional contributions to superannuation or retirement plans (as permitted by relevant legislation). TFC levels for each executive are set with reference to the market, the scope and nature of each role, the incumbent’s experience and individual performance. The Committee reviews and makes recommendations to the Board regarding TFC for KMP and senior executives annually in July, having regard to Company and individual performance and relevant comparative remuneration in the market. Annual adjustments approved by the Board are effective 1 February. The Board may also consider adjustments to executive remuneration outside of this as recommended by the CEO, such as on promotion or as a result of additional duties performed by the executive. Where new senior executives join the Company or existing executives are appointed to new roles, a review and benchmarking of fixed and total remuneration is conducted prior to the offer and execution of a new employment contract. Which benchmarks Remuneration for KMP is considered in the context of the skills and experience being sought and the global senior are used? retail market, as well as in relation to the other industries where we are increasingly seeking talent. Benchmarking is also undertaken against local industry peer groups and companies with a similar market capitalisation to Myer where relevant for the roles under review. 46 Myer Annual Report 2017 REMUNER ATION REPORT Continued 6.2 SHORT TERM INCENTIVE Myer’s STI plan for KMP and other senior executives operates on an annual basis subject to Board review and approval. The FY2017 STI applied to all eligible executives including KMP, subject to certain conditions and performance criteria being met which are reviewed and approved annually by the Board. Form and purpose of the plan What is the The STI plan is an annual, at risk component of an executive’s reward opportunity, designed to put a meaningful part STI plan? of the executive’s remuneration at risk. Payment under the STI is subject to achieving pre-determined Company and individual performance criteria. All senior managers, including the KMP and Group Executive participate in the STI. What is the STI targets are set as a percentage of the executive’s TFC. The current target levels for KMP are set out below. value of the STI opportunity? > CEO – 80 percent of TFC > Other KMP – 60 percent of TFC Does the STI 40 percent of any award payable to members of the Group Executive is deferred for a period of 12 months following include a deferred the end of the Performance Period. component? The deferred component of the CEO’s STI is provided as Restricted Shares while the deferred component for other Group Executives is paid in cash following the end of the deferral period. Gateway and performance measures Is there a The Board considers it critical that the Group should achieve a minimum acceptable level of profit before any performance payments are made under the STI plan, to reflect the focus on returns to shareholders. No STI is awarded to any ‘gateway’ and how participants if minimum performance across the Company does not reach the pre-determined threshold NPAT is it determined? level. The NPAT gateway is determined by the Board each year, with reference to the annual business plan, economic conditions and other relevant factors. Performance at or above the NPAT gateway determines the size of the STI pool which is available for payment, with profit above the threshold split between shareholders and STI plan participants, with a greater allocation towards shareholders. The size of the STI pool is then used to moderate the total outcome for all participants, resulting in individual payouts that are proportional to their achievement and the size of the pool. To incentivise performance against the transformation agenda, the FY2017 STI was structured around two key components: > NPAT, weighted at 60 percent of the total potential award; and > Individual objectives, including key financial measures related to the executive’s role, weighted at 40 percent of the total potential award. While each measure is assessed in isolation, any payment is subject to the achievement of the NPAT gateway. What were the FY2017 performance measures? Why were the Overall performance measures are selected to align with annual and long term business plans. Details of the FY2017 performance performance measures, and the strategic objectives they are aligned to, are set out in the table in section 2. measures selected? The Board believes that the largest component of an executive’s STI award should be driven by the financial performance of the Company, and accordingly 60 percent of the STI is linked to Company NPAT, providing close alignment with shareholder outcomes. Other financial and strategic objectives in the performance scorecard are set by the CEO (and approved by the Committee and the Board), and, combined with the Company NPAT measure, are intended to drive our strategy and deliver our financial results. These objectives and their targets align with our key financial metrics and strategic goals, and the measures selected for each executive are determined by reference to the specific objectives of the executive’s role for the financial year. Given that STI rewards are contingent on performance across a range of measures, maximum STI rewards can only be achieved for performance that is strong on all measures. Are the STI The disclosure of prospective STI measures and targets would provide the market and our competitors with our performance financial forecasts, and it is for this reason, we do not disclose them in advance. We will disclose outcomes and/ measures and targets disclosed? or performance against targets in instances where the disclosure would not involve the release of commercially sensitive information.  47 REMUNER ATION REPORT Continued Governance When are Performance objectives and targets are set at the beginning of the financial year, while performance against these performance targets is reviewed following the end of the financial year. targets set and reviewed? How is The Committee determines whether, or the extent to which, each target is satisfied following the end of the performance financial year, once the Company’s annual accounts are audited and have been approved by the directors. measured? If the hurdle is satisfied, an STI may be paid to participating KMP and other executives. The quantum of any STI reward provided will depend on the extent to which the maximum reward is achieved. A minimum threshold is also set, below which no STI reward will be provided. Once it has been determined whether each objective has been satisfied, the Committee will make a recommendation to the Board for approval of the STI awards to be paid to the CEO and executives. The Committee is responsible for assessing whether the performance criteria are met. To help make this assessment, the Committee receives reports on the Company’s performance from management. All proposed STI awards are verified by internal and external audit review prior to any award being made. The Committee has the discretion to recommend to the Board an adjustment to any award in light of unexpected or unintended circumstances. When are The component of the STI awards approved by the Board that is not subject to deferral is paid to participating KMP incentives paid? and executives in the month following the release of the Company’s results to the ASX. The deferred component of the CEO’s STI is provided as Restricted Shares, which the CEO will not be able to deal with during the 12 month deferral period. The deferred component of other Group Executives is paid in cash following the end of the 12 month deferral period. Cessation of employment, clawback or change of control If an individual Participants leaving employment during the performance year are generally not eligible to receive an award under ceases employment the STI. In certain circumstances (such as redundancy), the Board may consider eligibility for a pro rata payment. during the performance year, will they receive a payment? Does a ‘clawback’ The STI Plan allows the Board to take any steps that it determines appropriate to recover from the individual apply? executive any STI reward that was incorrectly provided as a result of a material misstatement in, or omission from, the Company’s financial statements. The provision applies only to those executives who were KMP of the Company at the time the financial statements were approved by the Board and issued by the Company. How would a The Board has absolute discretion in relation to the treatment, payment or provision of STI awards on a change of change of control control, which it would exercise in the best interests of the Company. The Board may also give the CEO notice that impact on STI the restriction period for any Restricted Shares will end if certain change of control events occur. entitlements? FY2017 Outcomes A detailed discussion of the FY2017 STI outcomes is presented in section 3.2. The percentage of the available STI reward that was paid in the financial year, and the percentage and value that was not paid is set out below: Name R Umbers D Bracken(2) G Devonport A Sutton Maximum STI STI % Actual STI Actual STI Total STI (as % of TFC) Maximum STI awarded paid (cash) deferred Awarded Proportion Amount of max. STI not paid(1) of max. STI not paid(1) 80% 60% 60% 60% $960,000 $600,000 $525,000 $396,000 0.0% 0.0% 0.0% 0.0% $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 100% $960,000 100% $600,000 100% 100% $525,000 $396,000 (1) Reflects the proportion and amount of the maximum STI that was forfeited due to the performance criteria not being achieved and scaling of the STI pool. (2) Mr Bracken stepped down as a KMP on 19 July 2017. 48 Myer Annual Report 2017 REMUNER ATION REPORT Continued 6.3 FY2017 LONG TERM INCENTIVE PLAN Features of the LTIP are outlined in the table below. In FY2017 the Board granted performance rights under the LTIP to KMP and other senior executives. Form and purpose of the plan What is the LTIP? The LTIP is an incentive that is intended to promote alignment between executive and shareholder interests over the longer term. Under the LTIP, performance rights may be offered annually to the CEO and nominated executives, including KMP. The employees invited to participate in the plan include executives who are considered to play a leading role in achieving the Company’s long term strategic and operational objectives. Each right offered is an entitlement to one fully paid ordinary share in the Company, subject to adjustment for capital actions, on terms and hurdles determined by the Board, including hurdles linked to Company performance and service. How is the LTIP The LTIP is delivered via a grant of performance rights. The number of performance rights that vest is not delivered? determined until after the end of the Performance Period. The performance right will therefore not provide any value to the holder between the dates the performance right is granted and the end of the Performance Period, and then only if the performance hurdles are satisfied. Performance rights do not carry entitlements to ordinary dividends or other shareholder rights until the performance rights vest and shares are provided. Accordingly, participating executives do not receive dividends during the Performance Period. How is the number The number of performance rights for each executive is determined as part of the calculation of total remuneration of performance for an executive role. The Committee determines LTIP awards by assessing the quantum required to provide a rights determined? market competitive total remuneration level, for on target performance. The exact number of performance rights allocated depends on each executive’s LTIP target. The value of the performance rights at the time they are granted is calculated based on the Volume Weighted Average Price (VWAP) of the Company’s shares for the five trading days up to and including the closing date of the offer, which generally falls within 10 days of the Company’s Annual General Meeting. Vesting and performance hurdles What is the The Performance Period commences at the beginning of the financial year in which the performance rights are Performance granted. For the performance rights granted under the FY2017 LTIP, the Performance Period started on 31 July 2016 Period? and ends after three years on 27 July 2019. Following the end of the Performance Period and after the Company has What are the performance hurdles? lodged its full year audited financial results for 2019 with the ASX, the Board will test the performance hurdles that apply to the FY2017 LTIP offer and will determine how many performance rights (if any) are eligible to vest. The performance measures approved by the Board for the FY2017 LTIP offer were ROFE, EPS and relative TSR: > 50 percent of the Award is subject to the ROFE hurdle. > 25 percent of the Award is subject to the EPS hurdle. > 25 percent of the Award is subject to the TSR hurdle. Why were the The hurdles were chosen to align shareholder returns with executive reward outcomes over the three year performance Performance Period and to complement the measures in the STI plan. hurdles chosen? The ROFE Hurdle balances the transformation requirements with the needs of shareholders. Significant investment in additional capital, and an increase in short term costs are required in the first three years of the New Myer plan. This will be instrumental in transforming the business and achieving sustained improvements in earnings and share price. The Board considers EPS the most effective measure for determining the underlying profitability of the business. The TSR Hurdle was selected in order to ensure alignment between comparative shareholder return and reward for executives. This measure also provides a direct comparison of the Company’s performance over the Performance Period against a comparator group of companies that would, broadly, be expected to be similarly impacted by changes in market conditions. As there are few direct department store competitors listed in the Australian market, the peer group is focused on companies with similar impacts and scope. 49 REMUNER ATION REPORT Continued What is the vesting The number of performance rights that vest will depend on how well Myer has performed during the Performance framework? Period. For superior performance, 100 percent 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 applicable performance rights will lapse and no performance rights can vest. For the FY2017 LTIP offer the following vesting hurdles apply: Performance rights subject to the ROFE Hurdle (50 percent of the Award) The Company’s ROFE at the end of the % of performance rights subject to the ROFE Hurdle that will Performance Period Up to but excluding 15.0% vest (rounded down to the nearest whole number) Nil Including 15.0% and up to but excluding 16.5% Pro rata, with linear progression between 50% and up to 100% 16.5% or greater 100% Performance rights subject to the EPS Hurdle (25 percent of the Award) The EPS Hurdle will be tested over the Performance Period by calculating the compound annual growth rate in the Company’s EPS using EPS at the end of FY2016 as the base year. The resulting growth rate will be used to determine the level of vesting for the performance rights subject to the EPS Hurdle. The table below sets out the percentage of performance rights subject to the EPS Hurdle that can vest depending on the Company’s growth in EPS: Growth in EPS (rounded down to the nearest whole number) Up to but excluding 20% Nil Including 20% and up to but excluding 25% Pro rata, with linear progression between 50% and up to 100% % of performance rights subject to the EPS Hurdle that will vest 25% or greater 100% Performance rights subject to the TSR Hurdle (25 percent of the Award) The TSR Hurdle will be tested following the end of the Performance Period by comparing the Company’s total shareholder return performance over the Performance Period relative to a set peer group. The peer group consists of Standard & Poor’s ASX 200 market constituents (excluding Finance, Health Care, Utilities, Consumer Staples Global Industry Classification Standard (GICS) sectors and Metals and Mining or Oil, Gas and Consumer Fuels GICS Industry groups). The table below sets out the percentage of performance rights subject to the TSR Hurdle that can vest depending on the Company’s relative TSR performance: TSR performance (rounded down to the nearest whole number) Up to but excluding 50th percentile Nil Including 50th percentile and up to but Pro rata, with linear progression between 50% and up to 100% % of performance rights subject to the TSR Hurdle that will vest excluding 75th percentile 75th percentile or greater 100% No. Each performance hurdle is only tested once at the end of the Performance Period. Are the performance hurdles subject to retesting? Do any restrictions Any shares provided on vesting of the performance rights will be subject to a restriction period of one year, during apply once the which they cannot be sold, transferred or otherwise dealt with. rights vest? 50 Myer Annual Report 2017 REMUNER ATION REPORT Continued Cessation of employment, change of control, clawback, participation in future issues and hedging arrangements Cessation of employment The treatment of performance rights on cessation of employment will depend on the date as well as the circumstances of cessation. Generally, if an executive ceases employment on or before the end of the restriction period due to resignation, termination for cause or gross misconduct, they will forfeit any interest in the rights. If employment ceases on or before the end of the restriction period for other reasons, the executive will retain an interest in the vested shares. Subject to applicable law, the Board has a discretion to allow different treatment (although the discretion is only likely to be exercised in exceptional circumstances). How would a change The Board has absolute discretion to allow full or pro rated accelerated vesting of performance rights in the event of control impact of certain change of control events, and would exercise this discretion in the best interests of the Company. LTIP entitlements? Does a ‘clawback’ The LTIP includes provisions for rights to lapse and interests in shares allocated and subject to restriction to apply? be forfeited, at the Board’s discretion, if rights or shares are granted, eligible to vest or allocated as a result of a material misstatement in, or omission from, the Company’s financial statements. The Myer Board would only exercise this discretion in respect of those executives who were KMP of the Company at the time the financial statements were approved by the Board and issued by the Company. How would a The rights and entitlements attaching to performance rights may be adjusted if the Company undertakes a bonus bonus or rights or rights issue or a capital reconstruction in relation to the Company’s shares. For example, in the event of a rights issue impact issue, the number of shares which an executive is entitled to be allocated on exercise of performance rights may be performance rights changed in a manner determined by the Myer Board and consistent with the ASX Listing Rules. under the LTIP? Do performance At the end of the applicable Performance Period, any performance rights that have not vested will lapse and no rights expire? shares will be provided for those performance rights. Do any other Executives are forbidden from entering into any hedging arrangements affecting their economic exposure to restrictions apply Performance Rights or restricted shares. to Performance Rights prior to vesting or subject to restriction? Executives are also forbidden from entering into transactions or arrangements prohibited under the Company’s Securities Dealing Policy. In FY2017, KMP and other senior executives received a grant of performance rights under the LTIP. The awards granted may deliver value to executives at the end of the three year Performance Period, subject to satisfaction of performance hurdles as set out in the table above. In addition, under the conditions of his appointment, Mr Devonport was awarded additional performance rights to the value of $200,000 under the LTIP in FY2017. These performance rights are subject to a condition of continuous employment with the Company through to the end of the Performance Period for the FY2017 LTIP. The following table summarises the FY2017 performance rights granted to KMP during the year: Total value of Valuation of each Number of performance rights performance right performance at grant date $ at grant date $ rights granted Exercise price Name R Umbers 1,080,000 1.25 0.84 1.25 1.25 0.84 1.25 1.25 0.84 1.25 1.34 1.25 0.84 1.25 404,221 202,111 202,111 336,851 168,426 168,426 294,745 147,372 147,373 149,711 148,214 74,108 74,107 nil nil nil nil nil nil nil nil nil nil nil nil nil Applicable Performance End of hurdles ROFE TSR EPS ROFE TSR EPS ROFE TSR EPS Service ROFE TSR EPS Period 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 27 July 2019 D Bracken(1) 900,000 G Devonport 987,500 A Sutton 396,000 (1) Mr Bracken stepped down as a KMP on 19 July 2017. The performance rights in this table held by Mr Bracken will lapse when he leaves the Company’s employment. 51                 REMUNER ATION REPORT Continued % 0 3 % 5 1 % 5 % 4 1 % 9 2 % 8 % 9 1 % 4 1 % 0 3 % 4 3 % 5 % 9 2 % 9 2 % 2 2 % 9 1 % 0 3 2 4 7 , 4 4 7 , 1 2 4 4 3 2 5 , 0 0 3 , 1 2 2 , 1 , 4 2 9 6 9 8 , 1 1 4 1 , 9 7 2 3 8 7 , 7 1 6 , 1 1 5 9 , 1 8 0 , 1 8 0 8 8 4 , 3 4 1 , 3 3 0 , 1 , 2 2 4 2 7 4 , 1 7 3 1 , 2 0 2 , 5 8 2 0 7 2 , 1 9 6 1 , 7 4 2 , 1 0 2 1 , 7 6 3 , 9 4 0 0 8 8 2 2 0 8 1 5 , , 1 0 3 8 3 2 1 , 2 9 1 , 4 9 3 , 1 , 1 9 2 2 6 7 6 7 7 , 5 4 1 5 1 5 6 1 6 , , 1 9 6 8 7 9 7 9 0 3 3 1 , 4 9 5 , 5 4 8 3 5 1 , 6 3 8 , 4 6 4 1 , 5 8 0 , 1 7 0 0 , 1 5 7 , 3 , 9 5 0 6 6 8 5 , 5 0 2 8 3 7 , 4 5 8 , 7 2 1 , 5 - - - - - - - - - - 5 3 2 5 , 2 1 7 , 1 , 5 6 0 6 1 2 , 1 6 1 6 9 1 , , 1 7 0 6 1 6 , 1 8 0 3 9 1 , 7 4 3 4 , 1 2 4 , 1 5 1 1 , 3 2 4 6 , 1 6 9 7 , 8 2 0 , 1 0 5 6 0 2 , , 4 6 8 8 6 2 , 1 8 0 3 9 1 , 4 3 9 6 7 8 , 6 1 6 9 1 , 0 5 5 2 9 3 , , 1 8 3 1 , 8 1 ) 7 7 9 2 1 ( , 2 9 4 9 2 6 , 6 1 6 9 1 , 9 3 5 0 1 , 5 5 0 5 3 8 , 8 0 3 9 1 , ) 0 8 2 ( 7 8 2 , 1 5 7 , 3 8 9 4 , 9 7 4 1 3 5 1 , , 0 4 5 2 1 1 , 5 2 6 0 6 7 , - - - - - - - - - - s t h g i r n o i t a r e n u m e r l a t o T ) 9 ( e s n e p x e ) 8 ( s t n e m y a p s t n e m y a p ) 7 ( e v a e l l a t o t b u S ) 6 ( n o i t a u n n a s t fi e n e b 5 6 0 6 1 , 6 1 4 , 1 4 ) 1 9 7 , 2 2 ( 8 7 7 , 1 4 8 2 1 0 7 5 , 7 - - - - - ) 8 0 5 0 3 , ( 3 7 7 , 7 2 ) 6 0 1 , 7 3 ( - - - 0 0 0 0 0 4 , , 4 1 5 9 0 2 8 2 3 , 7 5 7 5 5 6 4 7 3 , , 2 9 6 0 8 1 , 1 6 1 0 2 - , 4 8 3 0 8 1 , 1 7 1 0 2 s r e b m U R s r o t c e r i D e v i t u c e x E - , 7 3 9 0 3 0 , 1 7 1 0 2 ) 0 1 ( n e k c a r B D P M K e v i t u c e x E 6 8 0 , 7 2 2 , 2 9 6 0 8 9 - 0 9 1 , 7 5 8 - , 4 8 3 0 4 6 2 8 5 0 6 1 , 2 9 3 , 7 2 6 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 t r o p n o v e D G n o t t u S A - 5 9 8 , 8 0 7 , 3 7 1 0 2 n o i t a r e n u m e r P M K e v i t u c e x e l a t o T ) ( 4 r e h t O ) 3 ( d r a w a ) 2 ( I T S ) 1 ( y r a l a s Y F e m a N 7 3 5 8 1 1 , 0 0 0 0 0 4 , 7 3 8 , 1 7 9 4 0 1 , 6 4 5 3 , 6 1 0 2 y r a l a s h s a C ) 1 ( s e t o n t o o F . ) r a e y T B F e h t h t i w e c n a d r o c c a n i ( 7 1 0 2 h c r a M f o d n e e h t o t p u g n i k r a p r a c d e d i v o r p y n a p m o C f o t c e p s e r n i y n a p m o C e h t y b d i a p x a T s t fi e n e B e g n i r F d n a , l a u r c c a e v a e L l a u n n A n i t n e m e v o m e h t s e d u c n l i s t n e m y a p r e h t O . r e y M n o i j o t r e d r o n i l r e y o p m e s u o i v e r p s i h m o r f e n o g r o f n o i t a r e n u m e r e s i n g o c e r o t i t n e m t n o p p a s i h g n w o i l l o f s h t n o m 2 1 e b a y a p l , , 0 0 0 0 0 4 $ f o d r a w a n o n g i s a d e d r a w a s a w t r o p n o v e D G , 6 1 0 2 Y F n I ) 3 ( ) 4 ( . t n e m y a p l a u t c a f o r a e y e h t t o n , d e n r a e e r e w y e h t r a e y e h t r o f s n o i t i d n o c d n a e c n a m r o f r e p m a r g o r p o t e t a e r l s t n e m y a p I T S ) 2 ( . e s a b n o i t u b i r t n o c n o i t a u n n a r e p u s m u m i x a m d e h s i l b u p O T A e h t h t i w e n i l n i t i m i l l d o h s e r h t a o t p u n o i t u b i r t n o c n o i t a u n n a r e p u s y r o t u t a t s a e v i e c e r s e v i t u c e x E ) 6 ( . n o i t a u n n a r e p u s n a h t r e h t o d i a p s t fi e n e b t n e m y o p m e t s o p o n e r e w e r e h T l ) 5 ( . l a u r c c a e v a e l e c i v r e s g n o l n i t n e m e v o m e h t s e d u c n l i t fi e n e b s i h T ) 7 ( s t c e fl e r d n a , e t a d t n a r g t a e u a v l r i a f e h t n o d e s a b s i e s n e p x e s i h T . t n e m y a P d e s a B e r a h S 2 B S A A r e d n u d e n m i l r e t e d s n o i t a u a v n o d e s a b d o i r e p e h t r o f d e s n e p x e t n u o m a e h t s t n e s e r p e r e s n e p x e t n e m y a p d e s a b e r a h s e h T . d o i r e p g n i t r o p e r e h t n i s t fi e n e b n o i t a n m i r e t y n a d n a s t n e m y a p n o i t n e t e r , s l a u r c c a e v a e l e c i v r e s g n o l f o e c n a l a b e h t , n o i t a u n n a r e p u s , s e s n e p x e x a T t fi e n e B e g n i r F , s t n e m y a p e v i t n e c n i m r e t t r o h s r o s e s u n o b y n a , y r a l a s e s a b f o t n e m t a e r t e s n e p x e g n i t n u o c c a e h t s t c e fl e r i s t n e m y a p d e s a b e r a h s g n d u c x e e s n e p x e n o i t a r e n u m e r l l a t o T t s e v y l l a i t r a p , t s e v y l l u f y a m t n a r g y t i u q e e h t s A . e g n a h c s i h t t c e fl e r o t d o i r e p t n e r r u c e h t n i e d a m s i j t n e m t s u d a , g n i t s e v o t n o i t a e r n l i e g n a h c s n o i t a t c e p x e e r e h W . t s e v o t d e t c e p x e s t h g i r f o r e b m u n e h t f o s n o i t a t c e p x e f i d n a , d o i r e p e h t n i d e v i e c e r s t n e m y a p h s a c t n e s e r p e r l t o n s e o d d e s o c s i d t n u o m a e h T . r a e y l r a u c i t r a p a n i l d e s o c s i d t n u o m a e h t o t t n e r e f f i d e b o t y l e k i l s i s e s i l a e r y l e t a m i t l u P M K e h t t a h t t fi e n e b e h t , l l a t a t s e v t o n r o . s t n e m y a p d e s a b e r a h s d e l t t e s - h s a c o n e r e w e r e h t d n a s t n e m y a p d e s a b e r a h s d e l t t e s - y t i u q e r e h t o o n e r e w e r e h T . d o i r e p e r u t u f a n i t n u o m a n o i t a r e n u m e r e h t f o l a s r e v e r n i t l u s e r y a m t e m t o n e r a s n o i t i d n o c g n i t s e v ) 8 ( ) 9 ( l . t n e m y o p m e s ’ y n a p m o C e h t s e v a e l e h n e h w e s p a l l l i w n e k c a r B r M y b d e h e b a t l l s i h t n i s t h g i r e c n a m r o f r e p e h T . 7 1 0 2 y l u J 9 1 n o P M K a s a n w o d d e p p e t s n e k c a r B r M ) 0 1 ( . s n o i t u b i r t n o c n o i t a u n n a r e p u s l a n o i t i d d a g n d u c n i l i , s e v i t u c e x E e h t y b d e t n e m e p m l i t n e m e g n a r r a e c fi i r c a s y r a l a s y n a d n a s e c n e s b a d e t a s n e p m o c m r e t t r o h s s e d u c n l i d i a p n o i t a r e n u m e r e h t l f o t n e m e e h c a e f o t n u o m a d n a e r u t a n e h t f o s l i a t e d s w o h s t I . 1 0 0 2 t c A s n o i t a r o p r o C e h t f o A 0 0 3 n o i t c e s h t i w e c n a d r o c c a n i d e r a p e r p n e e b s a h e b a t g n w o i l l l o f e h T P M K E V I T U C E X E R O F S E M O C T U O N O I T A R E N U M E R . 7 n i r a e y e h t g n i r u d d e s n e p x e t n u o m a e h t l t c e fl e r d e s o c s i d s t n u o m a e h t , s e v i t n e c n i n o i t n e t e r d n a s t n e m y a p d e s a b e r a h s f o e s a c e h t n I . d o i r e p s i h t n i d e d i v o r p s e c i v r e s r o f d e d r a w a r o % f o % n o i t a r e n u m e R e c n a m r o f r e P - e r a h S d e s a b i g n d u l c x E n o i t a n m r e T i g n o L - n o N f o g n i t s i s n o c d e t a l e r t n e m y a p d e s a b e r a h s r e h t o & e c i v r e s - r e p u S y r a t e n o m n o - n g i S h s a C e s n e p x e n o i t a r e n u m e r l a t o T s t fi e n e b m r e t - g n o L t s o P ) 5 ( s t fi e n e b t n e m y o p m e l l s t fi e n e b e e y o p m e m r e t - t r o h S n a h t s s e l r o e r o m e b y a m h c i h w , r a e y e h t g n i r u d l a u d i v i d n i e h t o t d i a p y l l a u t c a t n u o m a e h t t c e fl e r y l i r a s s e c e n t o n s e o d s i h t y l i g n d r o c c a d n a s d r a d n a t s g n i t n u o c c a t n a v e e r h t i w e c n a d r o c c a l . e g a p g n w o i l l o f e h t n o s e b a t e h t n l i n w o h s t n u o m a e h t 52 Myer Annual Report 2017                     REMUNER ATION REPORT Continued 7.1 UNVESTED PERFORMANCE RIGHTS Details of performance rights granted to KMP under the previous equity incentive plans that remain unvested as at 29 July 2017 are set out in the table below: Grant type Rights (EPS hurdle)(1) Rights (TSR hurdle)(1) Value per Vesting date (if holder Number of instrument at remains employed by a Grant date instruments grant date $ Myer Group company) Expiry date 15 Dec 2014 15 Dec 2014 215,624 431,250 215,624 Rights (Business Transformation hurdle)(1) 15 Dec 2014 Rights (Service hurdle)(1,2) Rights (Service hurdle)(3) Rights (ROFE hurdle) Rights (Sales/SQM hurdle) Rights (Service hurdle)(3) Rights (ROFE hurdle) Rights (EPS hurdle) Rights (TSR hurdle) Total 15 Dec 2014 375,000 5 Jan 2016 5 Jan 2016 5 Jan 2016 22 Dec 2016 173,913 1,359,781 1,359,781 149,711 22 Dec 2016 1,184,031 22 Dec 2016 22 Dec 2016 592,017 592,017 6,648,749 $1.08 $0.30 $1.08 $1.08 $1.01 $1.01 $1.01 $1.34 $1.25 $1.25 End of Performance Period 31 Oct 2017 End of Performance Period 31 Oct 2017 End of Performance Period 31 Oct 2017 End of Performance Period 31 Oct 2017 End of Performance Period 31 Oct 2018 End of Performance Period 31 Oct 2020 End of Performance Period 31 Oct 2020 End of Performance Period 31 Oct 2019 End of Performance Period 31 Oct 2019 End of Performance Period 31 Oct 2019 $0.84 End of Performance Period 31 Oct 2019 (1) The Board considers it important that participants are protected from the dilutive impacts of a rights issue in which they are ineligible to participate. The Board therefore determined in August 2015, in accordance with the terms of the FY2014 and FY2015 LTI awards, to adjust the number of shares that may be provided on exercise of the performance rights to take into account the dilution in the value of the Company following the entitlement offer made in September 2015 so that performance rights holders are not disadvantaged as a result of the rights issue. The number of shares which a performance rights holder is entitled to be provided with in the event that the relevant performance rights vest will be calculated in accordance with the following calculation: = PR x (B/A) where: PR = the total number of shares the performance rights holder is entitled to be provided with on exercise of a performance right prior to the entitlement offer; A = the theoretical price (Theoretical Ex-Rights Price or TERP) at which Myer shares should trade immediately after the ex-date for the Entitlement Offer (being $1.1329); and B = the share price at which Myer shares traded at the close of business on the day immediately prior to the Entitlement Offer (being $1.21). (2) These performance rights apply to Mr Umbers (250,000 rights) and Mr Bracken (125,000 rights). Mr Bracken’s performance rights will lapse in October 2017 as a result of him leaving the Company’s employment. (3) These performance rights apply to Mr Devonport. Details of performance rights over ordinary shares in the Company currently provided as remuneration and granted during the current year to executive KMP are set out below. Further information on the LTIP is set out in note H4 of the Financial Statements. 7.2 EQUITY INSTRUMENTS GRANTED TO KMP Name R Umbers D Bracken(3) G Devonport A Sutton Value of Number of performance rights granted(1) performance rights at grant date(2) $ 808,443 673,703 739,201 296,429 1,080,000 900,000 987,500 396,000 Vesting Date 27-Jul-19 27-Jul-19 27-Jul-19 27-Jul-19 Number of rights vested Value of rights at vest date during the period - - - $ - - - 11,145 14,154 (1) No performance rights were granted to Non-Executive Directors during the reporting period. (2) The VWAP for the allocation of the 2017 grant was $1.3359. (3) Mr Bracken stepped down as a KMP on 19 July 2017. The performance rights in this table held by Mr Bracken will lapse when he leaves the Company’s employment. 7.3 SHARES PROVIDED ON EXERCISE OF OPTIONS There were no ordinary shares in the Company provided as a result of the exercise of options to any director of the Company and KMP. No amounts are unpaid on any share provided on the exercise of options. 53         REMUNER ATION REPORT Continued 7.4 LONG TERM INCENTIVES ON ISSUE For each grant of options or grant of performance rights included in this report, the percentage of the grant that was paid, or that vested, in the financial year, and the percentage and value that was forfeited because the service and performance criteria were not met is set out below. Options and performance rights vest provided the vesting conditions or performance hurdles are met. No options or performance rights will vest if the hurdles (either service or performance) are not satisfied, therefore the minimum value of the options or performance rights yet to vest is nil. Name R Umbers D Bracken(3) G Devonport A Sutton Grant date 22 Dec 2016 5 Jan 2016 15 Dec 2014(2) 22 Dec 2016 5 Jan 2016 15 Dec 2014 22 Dec 2016 5 Jan 2016 22 Dec 2016 5 Jan 2016 15 Dec 2014(2) 27 Nov 2013 Expiry date 31 Oct 2019 31 Oct 2020 31 Oct 2017 31 Oct 2019 31 Oct 2020 31 Oct 2017 31 Oct 2019 31 Oct 2020 31 Oct 2019 31 Oct 2020 31 Oct 2017 31 Oct 2016 Vested % Forfeited performance % rights value of grant yet to be expensed(1) Value of vested Maximum total - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12.50 87.50 14,154 1,051,232 591,630 16,710 87,138 - 8,135 417,545 532,884 209,965 71,285 8,696 - (1) This represents the maximum accounting value of the LTI awards (rights) as at their grant date. (2) The rights granted under the FY2015 LTIP will be tested for vesting following the release of the FY2017 results and details disclosed in the FY2018 Remuneration Report. (3) Mr Bracken stepped down as a KMP on 19 July 2017. The performance rights referred to in this table held by Mr Bracken which might otherwise have vested in 2017 will lapse in October 2017. All other rights will lapse when he leaves the Company’s employment. 8. EXECUTIVE SERVICE AGREEMENTS Remuneration and other terms of employment for the CEO and other KMP are formalised in service agreements. The termination provisions for KMP, as set out in their service agreements, are described below: Name R Umbers D Bracken(1) G Devonport A Sutton (1) Mr Bracken stepped down as a KMP on 19 July 2017. Termination notice Termination notice Termination payment period initiated period initiated where initiated Contract type Rolling contract Rolling contract Rolling contract Rolling contract by KMP 6 months 3 months 6 months 3 months by Company 12 months 6 months 6 months 6 months by Company 12 months 6 months 6 months 6 months 54 Myer Annual Report 2017         REMUNER ATION REPORT Continued 9. EQUITY The number of rights over ordinary shares in the Company held during the financial period by executive KMP of the Group, including their personally related parties, are set out below. No rights over ordinary shares are held by Non-Executive Directors. 2017(3) R Umbers D Bracken(2) G Devonport A Sutton 2016(3) R Umbers D Bracken G Devonport A Sutton Opening Granted as balance compensation Exercised Lapsed 1,507,879 1,226,357 858,695 627,202 568,749 443,749 - 359,409 808,443 673,703 739,201 296,429 939,130 782,608 858,695 313,042 - - - - - - - (11,145) (78,015) - - - (45,249) - - - - Closing balance(1) 2,316,322 1,900,060 1,597,896 834,471 1,507,879 1,226,357 858,695 627,202 (1) All vested rights are exercisable at the end of the period. (2) Mr Bracken stepped down as a KMP on 19 July 2017. The performance rights referred to in this table granted to Mr Bracken in 2016 and 2017 will lapse when he leaves the Company’s employment. (3) As noted on page 53 above, the number of shares Mr Umbers and Mr Sutton will be entitled to be provided with in the event performance rights awarded to them under the 2014 and 2015 LTI awards vest has been adjusted in accordance with the terms of those awards. If performance rights under the 2014 and 2015 LTI awards vest, the adjustments will result in an additional 38,706 and 15,312 (respectively) shares being provided in relation to performance rights under the 2014 LTI plan, and an additional 63,912 and 21,304 (respectively) shares being provided in relation to performance rights under the 2015 LTI plan. An additional 58,438 shares would be provided to Mr Devonport in respect of the 2015 LTI award based on the same adjustment. Mr Devonport did not participate in the 2014 LTI award. 55               REMUNER ATION REPORT Continued The number of shares in the Company held during the financial period by each director of the Company and other KMP of the Group, including their personally related parties are set out below. There were no shares granted during the reporting period as compensation. Received on vesting of rights to Other changes Opening balance deferred shares during the year Closing balance 2017 Directors P McClintock A Brennan I Cornell C Froggatt J Stephenson(1) R Thorn D Whittle Other KMP R Umbers D Bracken(2) G Devonport A Sutton 2016 Directors P McClintock A Brennan I Cornell C Froggatt R Thorn D Whittle R Myer(3) Other KMP R Umbers D Bracken(2) G Devonport A Sutton 258,400 75,122 16,000 24,056 - 225,400 - 212,230 50,000 252,000 45,249 181,000 53,658 10,000 10,040 161,000 - 733,999 - 50,000 - 25,000 - - - - - - - 114,617 - - - - - - - - 12,345 - - - 11,145 (45,249) 77,400 21,464 6,000 14,016 64,400 - 188,680 212,230 - 252,000 20,249 - - - - - - - - - - - 258,400 75,122 16,000 24,056 - 225,400 12,345 326,847 50,000 252,000 11,145 258,400 75,122 16,000 24,056 225,400 - 922,679 212,230 50,000 252,000 45,249 (1) Ms Stephenson was appointed as a Director on 28 November 2016. (2) Mr Bracken stepped down as KMP on 19 July 2017. (3) Mr Myer ceased to be a Director of the Company on 20 November 2015. 10. LOANS There were no loans made to KMP or entities related to them, including their personally related parties, or other transactions at any time during FY2016 or FY2017. 11. DEALING IN SECURITIES Under the Securities Dealing Policy, directors and senior executives are prohibited from entering into hedging arrangements with respect to the Company’s securities. A copy of the Securities Dealing Policy is available on the Myer Investor Centre website. 12. NON-EXECUTIVE DIRECTOR REMUNERATION Fees and payments to non-executive directors reflect the demands upon and responsibilities of those directors. The Board, on recommendation of the Human Resources 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: > Chairman’s fees and payments; > non-executive directors’ fees and payments; and > payments made in relation to the Chairman of committees or for other specific tasks that may be performed by directors. 56 Myer Annual Report 2017                                                   REMUNER ATION REPORT Continued Non-executive directors’ fees are determined within an aggregate directors’ fee pool limit as approved from time to time by Myer shareholders at the Annual General Meeting. The maximum aggregate limit includes superannuation contributions for the benefit of non- executive directors and any fees which a non-executive director agrees to sacrifice for other benefits. It does not include reimbursement of genuine out of pocket expenses, genuine special exertions fees paid in accordance with the Company’s constitution, or certain issues of securities under ASX Listing Rule 10.11 or 10.14, with the approval of shareholders. The current maximum aggregate fee pool limit is $2,150,000 per annum. The aggregate fee pool limit has not changed since the Company was listed in November 2009. Base fees for non-executive directors include payment for participation on Board Committees, however an additional payment is made to those who serve as Chairman on a committee to recognise the additional responsibility and time requirements involved in chairing a committee. Base fees for non-executive directors were not increased in FY2017 and have not increased since 2009. During FY2017, at the suggestion of the Chairman, the Board resolved to reduce the base annual fee for his role by $50,000 per annum effective from the beginning of FY2018. This will be reflected in the FY2018 Remuneration Report. The following yearly fees applied in FY2017: Base annual fees Chairman (all inclusive) Other Non-Executive Directors Additional annual fees Audit Finance and Risk Committee – Chairman Audit Finance and Risk Committee – member Human Resources and Remuneration Committee – Chairman Human Resources and Remuneration Committee – member Nomination Committee – Chairman Nomination Committee – member $400,000 $150,000 $30,000 – $22,500 – – – 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 trading ‘windows’ for share trading consistent with the Company’s Securities Dealing Policy. 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. The table below shows the remuneration amounts recorded in the financial statements in the period for non-executive directors: Cash salary FY (incl. Committee fees) Superannuation Total Name Non-executive directors P McClintock A Brennan I Cornell C Froggatt J Stephenson(1) R Thorn D Whittle Former non-executive directors R Myer Total non-executive directors (1) Ms Stephenson was appointed as a Director on 28 November 2016. 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 380,384 380,692 162,900 162,900 135,750 135,750 156,113 156,113 80,730 - 135,750 135,750 135,750 79,188 - 70,734 1,187,377 1,121,127 19,616 19,308 17,100 17,100 14,250 14,250 16,387 16,387 8,474 - 14,250 14,250 14,250 8,312 - 6,718 104,327 96,325 400,000 400,000 180,000 180,000 150,000 150,000 172,500 172,500 89,204 - 150,000 150,000 150,000 87,500 - 77,452 1,291,704 1,217,452 57                                 FI NANCIAL S TA TEMENTS FO R THE PERIO D END ED 29 JULY 2017 Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements A. Group performance A1 Segment information A2 Revenue A3 Expenses A4 Income tax A5 Earnings per share B. Working capital B1 Trade and other receivables and prepayments B2 Inventories B3 Trade and other payables C. Capital employed C1 Property, plant and equipment C2 Intangible assets C3 Provisions C4 Deferred income D. Net debt D1 Cash and cash equivalents D2 Reconciliation of profit after income tax to net cash inflow from operating activities D3 Borrowings 59 60 61 62 63 64 64 66 67 69 70 71 71 72 74 77 79 80 80 81 E. Risk management E1 Financial risk management E2 Derivative financial instruments F. Equity F1 Contributed equity F2 Retained earnings and reserves F3 Dividends G. Group structure G1 Subsidiaries G2 Deed of cross guarantee G3 Parent entity financial information G4 Equity accounted investment H. Other information H1 Contingencies H2 Commitments H3 Related party transactions H4 Share-based payments H5 Remuneration of auditors H6 Events occurring after the reporting period I. Other accounting policies 82 88 90 92 94 95 96 99 100 101 101 102 102 104 104 105 58 Myer Annual Report 2017 CONSOLIDATED INCOME STATEMENT for the period ended 29 July 2017 Total sales value Concession sales Sale of goods Sales revenue deferred under customer loyalty program Revenue from sale of goods Other operating revenue Cost of goods sold Operating gross profit Other income Selling expenses Administration expenses Share of net profit/(loss) of equity-accounted associate Dilution of investment in equity-accounted associate Restructuring and store exit costs, onerous lease expense and impairment of assets Earnings before interest and tax Finance revenue Finance costs Net finance costs Profit before income tax Income tax expense Profit for the period attributable to owners of Myer Holdings Limited Earnings per share attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share The above consolidated income statement should be read in conjunction with the accompanying notes. 2017 2016 52 weeks 53 weeks Notes $’000 $’000 A2 3,201,866 3,289,568 (701,678) (610,553) A2 2,500,188 2,679,015 (34,847) (38,861) A2 A2 2,465,341 2,640,154 176,485 161,689 (1,421,394) (1,527,552) 1,220,432 1,274,291 - 71 (819,055) (842,217) (292,212) (318,039) G4 G4 A3 A2 A3 A4 A5 A5 (1,176) (1,338) (65,615) 41,036 436 (11,259) (10,823) 30,213 (18,274) 11,939 (620) - (18,250) 95,236 906 (15,447) (14,541) 80,695 (20,152) 60,543 Cents Cents 1.5 1.4 7.7 7.7 59 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the period ended 29 July 2017 Profit for the period Other comprehensive income Items that may be reclassified to profit or loss: Cash flow hedges Exchange differences on translation of foreign operations Other comprehensive income for the period, net of tax Total comprehensive income for the period attributable to owners of Myer Holdings Limited Notes F2 F2 2017 2016 52 weeks 53 weeks $’000 11,939 $’000 60,543 547 329 876 12,815 (14,486) (221) (14,707) 45,836 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 60 Myer Annual Report 2017 CONSOLIDATED BAL ANCE SHEET as at 29 July 2017 ASSETS Current assets Cash and cash equivalents Trade and other receivables and prepayments Inventories Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Derivative financial instruments Investment in associate Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Deferred income Derivative financial instruments Current tax liabilities Other liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred income Deferred tax liabilities Derivative financial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Retained earnings Reserves Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. Notes 2017 $'000 2016 $'000 D1 B1 B2 E2 C1 C2 E2 G4 B3 C3 C4 E2 D3 C3 C4 A4 E2 F1 F2 F2 30,591 27,602 45,207 37,883 372,374 396,297 - 351 430,567 479,738 460,211 445,379 985,657 1,019,671 - - 2,094 80 9,203 2,271 1,447,962 1,476,604 1,878,529 1,956,342 379,740 400,590 87,295 9,817 7,944 1,627 591 94,228 10,812 7,127 7,033 795 487,014 520,585 143,367 13,821 75,927 84,574 958 318,647 805,661 147,273 19,754 69,702 88,444 2,819 327,992 848,577 1,072,868 1,107,765 739,329 342,146 (8,607) 739,338 379,483 (11,056) 1,072,868 1,107,765 61 CONSOLIDATED STATEMENT OF CHANGES IN EQUIT Y for the period ended 29 July 2017 Contributed Retained Notes equity $'000 earnings Reserves $'000 Balance as at 25 July 2015 Net profit for the period Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Dividends paid Employee share schemes Balance as at 30 July 2016 Net profit for the period Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Acquisition of treasury shares Issue of treasury shares to employees Dividends paid Employee share schemes F1 F3 F2 F1 F1 F3 F2 524,755 335,366 - - - 214,583 - - 60,543 - 60,543 - (16,426) - 214,583 (16,426) $'000 2,895 - (14,707) (14,707) - - 756 756 Total $'000 863,016 60,543 (14,707) 45,836 214,583 (16,426) 756 198,913 739,338 379,483 (11,056) 1,107,765 - - - (196) 187 - - 11,939 - 11,939 - - (49,276) - (9 ) (49,276) - 876 876 - - - 1,573 1,573 11,939 876 12,815 (196) 187 (49,276) 1,573 (47,712) Balance as at 29 July 2017 739,329 342,146 (8,607) 1,072,868 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 62 Myer Annual Report 2017 CONSOLIDATED STATEMENT OF CA SH FLOWS for the period ended 29 July 2017 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Other income Interest paid Tax paid Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for intangible assets Payment for acquisition of assets, under business combination Lease incentives and contributions received Net investment in associate Interest received Net cash outflow from investing activities Cash flows from financing activities Repayment of borrowings, net of transaction costs Dividends paid to equity holders of the parent Payment for acquisition of treasury shares Proceeds from the issue of shares, net of transaction costs Other Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial period Cash and cash equivalents at end of period The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 2017 2016 52 weeks 53 weeks Notes $’000 $’000 2,931,853 3,101,149 (2,744,651) (2,915,467) 187,202 185,682 - (10,165) (27,759) 149,278 (88,452) (24,217) (13,000) 16,758 (966) 421 71 (15,894) (20,369) 149,490 (40,479) (11,891) - 1,856 (8,680) 943 D2 G1 (109,456) (58,251) (5,000) (295,000) F3 (49,276) (16,426) (196) - 34 - 212,011 60 (54,438) (99,355) (14,616) 45,207 30,591 (8,116) 53,323 45,207 D1 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A. GROUP PERFORMANCE This section provides additional information regarding lines in the financial statements that are most relevant to explaining the performance of the Group during the period, including the applicable accounting policies applied and significant estimates and judgements made. A1 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. The Group also undertakes activities outside the department store retail business through its subsidiaries, sass & bide and FSS Retail Pty Ltd. On the basis that this aspect of the business represents less than 10% of the total Group's operations and has similar economic characteristics to the department store retail business, it has not been disclosed as a separate reporting segment. Accounting policy 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. A2 REVENUE Sales revenue Total sales value Concession sales Sale of goods Sales revenue deferred under customer loyalty program Revenue from sale of goods Other operating revenue Concessions revenue Other Finance revenue Interest revenue Total revenue 2017 2016 52 weeks 53 weeks $’000 $’000 3,201,866 3,289,568 (701,678) (610,553) 2,500,188 2,679,015 (34,847) (38,861) 2,465,341 2,640,154 158,055 18,430 176,485 140,416 21,273 161,689 436 906 2,642,262 2,802,749 Other includes revenue in relation to the gift card non-redemption income, forfeited lay-by deposits and financial services income. 64 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A2 REVENUE (CONTINUED) Accounting policy Total sales value presented in the income statement represents proceeds from sale of goods (both from the Group and concession operators) and prior to the deferral of revenue under the Myer 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 by the Group 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 in Myer stores on the basis that the inventory sold is owned by the concession operator at the time of sale and not the Group. The Group’s share of concession sales is recognised as revenue within other operating revenue at the time the sale is made. Interest revenue 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. Critical accounting estimates and judgements – customer loyalty program The Group operates a loyalty program where customers accumulate award 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. 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A3 EXPENSES Profit before income tax includes the following specific expenses: Employee benefits expenses Defined contribution superannuation expense Other employee benefits expenses Total employee benefits expenses Depreciation, amortisation and write-off expense Finance costs Interest and finance charges paid/payable Fair value losses on interest rate swap cash flow hedges, transferred from equity Finance costs expensed Rental expense relating to operating leases Minimum lease payments Contingent rentals Total rental expense relating to operating leases Net foreign exchange gains Restructuring and store exit costs, onerous lease expense and impairment of assets The following individually significant items are included within restructuring and store exit costs, onerous lease expense and impairment of assets in the consolidated income statement: Restructuring and redundancy costs1 Store exit costs and other asset impairments2 Support office onerous lease expense and impairment of assets3 Income tax benefit Restructuring and store exit costs, onerous lease expense and impairment of assets, net of tax 2017 2016 52 weeks 53 weeks $’000 $’000 38,313 426,161 39,528 456,174 464,474 495,702 91,480 92,758 9,071 2,188 11,259 13,146 2,301 15,447 227,468 228,955 2,607 4,522 230,075 233,477 (12,632) (5,737) 6,347 48,058 11,210 65,615 (9,606) 56,009 5,754 12,496 - 18,250 (9,531) 8,719 1 2. 3. The Group has completed several restructuring programs during the period resulting in redundancy and other costs being incurred or committed but not yet paid. Refer to note C3 for more information. Store exit costs and other asset impairments includes net costs associated with store and distribution centre space optimisation during or after the end of the period that have been committed to prior to the end of the period (2016: net costs associated with announcement of Brookside, Orange, Wollongong and Logan store closures, new store terminations and space optimisation). The Group also recognised an impairment of the sass & bide goodwill and brand name totalling $38.8 million and a write-down of the investment in Austradia Pty Limited of $6.8 million. Refer to note C1, C2, C3 and G4 for more information. In March 2017, the Group entered into an agreement to hand back surplus space in the support office. A portion of this space was provided for as part of the onerous lease provision recorded in FY15, with further excess space subsequently identified due to ongoing restructuring completed. The Group has recognised a $9.1 million onerous lease provision relating to further surplus space identified. This provision expense is partially offset by the write-back of the fixed lease rental increase provision and deferred income associated with this space. The assets associated with this surplus space were impaired and included in this amount. Refer to note C1, C3 and C4 for more information. Accounting policy The expenses disclosed above are also disclosed in the following sections of the financial statements: > Employee benefits expenses – refer to note C3 > Depreciation and amortisation expense – refer to note C1 and C2 > Finance costs – refer to note D3 and E2 > Rental expense relating to operating leases – refer to note H2 > Net foreign exchange gains – refer to note F2 Individually Significant Items Certain items have been separately disclosed and presented as individually significant based on the nature and/or impact these items have on the Group’s financial performance for the period. 66 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A4 INCOME TAX (a) Income tax expense (i) Income tax expense Current tax Deferred tax Income tax expense1 Deferred income tax expense included in income tax expense comprises: Decrease/(Increase) in deferred tax assets (Decrease)/Increase in deferred tax liabilities (ii) Numerical reconciliation of income tax expense to prima facie tax payable Profit before income tax expense Tax at the Australian tax rate of 30% (2016: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible asset impairments Non-deductible losses Applied capital losses not previously recognised Sundry items Adjustments for current tax of prior periods Income tax expense1 2017 2016 52 weeks 53 weeks $’000 $’000 23,925 (5,651) 18,274 26,740 (6,588) 20,152 2,359 (8,010) (5,651) 1,094 (8,065) (6,971) 30,213 9,064 80,695 24,208 10,156 754 - (278) 19,696 (1,422) 18,274 - 880 (4,038) (383) 20,667 (515) 20,152 1. Income tax expense includes an income tax benefit of $9.6 million (2016: $9.5 million) attributable to the restructuring and store exit costs, onerous lease expense and impairment of assets recorded during the period. Refer to note A3 for more information. 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 2017 $'000 2016 $'000 15,744 18,692 2,543 5,306 1,147 43,432 (43,432) - 45,352 (2,359) (31) - 470 18,202 17,763 3,304 4,374 1,709 45,352 (45,352) - 44,377 (1,596) - 2,571 - 43,432 45,352 421 6,985 122,424 123,965 4,524 637 128,006 (43,432) 84,574 2,121 725 133,796 (45,352) 88,444 133,796 (8,010) 2,220 141,861 (8,065) - 128,006 133,796 A4 INCOME TAX (CONTINUED) (b) Deferred tax assets Deferred tax assets comprise temporary differences attributable to: Employee benefits Non-employee provisions and accruals Amortising deductions Trading stock Tax losses Total deferred tax assets Set off of deferred tax assets pursuant to set off provisions Net deferred tax assets Movement Carrying amount at beginning of period Credited/(charged) to income statement Credited/(charged) to other comprehensive income Credited/(charged) to contributed equity Business combination Carrying amount at end of period (c) Deferred tax liabilities Deferred tax liabilities comprise temporary differences attributable to: Property, plant, equipment and software Brand names Deferred income Sundry items Set off of deferred tax assets pursuant to set off provisions Net deferred tax liabilities Movement Carrying amount at beginning of period Charged/(credited) to income statement Acquisition of brand name Carrying amount at end of period 68 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A4 INCOME TAX (CONTINUED) Accounting policy 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 arise 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. Deferred tax measurement of indefinite life intangible assets In November 2016, the IFRS Interpretations Committee published an agenda decision relating to the expected manner of recovery of indefinite life intangible assets for the purpose of measuring deferred taxes, in accordance with AASB 112 Income Taxes. The Interpretations Committee noted that the fact that an entity does not amortise an intangible asset with an indefinite useful life does not mean that the entity will recover the carrying amount of that asset only through sale and not through use. Based on this agenda decision, the Group determines that the expected recovery of the carrying amount will be through use and has retrospectively changed its accounting policy for deferred tax liabilities recorded in relation to intangible assets with an indefinite useful life. The impact of this change on the Consolidated Balance Sheet is a retrospective increase of $115.5 million to goodwill (refer to note C2) and deferred tax liabilities. There was no other impact from this accounting policy change. 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. A5 EARNINGS PER SHARE (a) Basic earnings per share Total basic earnings per share attributable to the ordinary equity holders of the Company (b) Diluted earnings per share Total diluted earnings per share attributable to the ordinary equity holders of the Company 2017 cents 2016 cents 1.5 1.4 7.7 7.7 2017 $'000 2016 $'000 (c) Reconciliation of earnings used in calculating earnings per share Earnings used in calculation of basic and diluted EPS attributable to ordinary shareholders 11,939 60,543 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 A5 EARNINGS PER SHARE (CONTINUED) 2017 2016 Number Number (d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 821,278,815 786,845,842 Adjustments for calculation of diluted earnings per share - performance rights 3,167,034 2,216,778 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 824,445,849 789,062,620 (e) Information concerning the classification of securities Performance rights granted to employees under the Myer Long Term 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 performance rights granted have not been included in the determination of basic earnings per share. Details relating to performance rights are set out in note H4. All performance rights outstanding at period end have been included in the calculation of diluted earnings per share because no rights are considered antidilutive for the period ended 29 July 2017. Accounting policy Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to owners of the Company 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. 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. B. WORKING CAPITAL This section provides additional information regarding lines in the financial statements that are most relevant to explaining the assets used to generate the Group’s trading performance during the period and liabilities incurred as a result, including the applicable accounting policies applied and significant estimates and judgements made. B1 TRADE AND OTHER RECEIVABLES AND PREPAYMENTS Trade receivables Provision for impairment Other receivables Prepayments Fair value and risk exposure 2017 $'000 5,586 (763) 4,823 12,273 10,506 22,779 27,602 2016 $'000 11,565 (1,546) 10,019 18,925 8,939 27,864 37,883 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. Information about the Group's exposure to credit risk, foreign currency risk and interest rate risk in relation to trade and other receivables and the Group's financial risk management policy is provided in note E1. 70 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 B1 TRADE AND OTHER RECEIVABLES AND PREPAYMENTS (CONTINUED) Accounting policy Collectability 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 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 as an expense in the income statement. 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. B2 INVENTORIES Retail inventories 2017 $'000 2016 $'000 372,374 396,297 Provision for write-down of inventories to net realisable value amounted to $10.6 million (2016: $12.7 million). This was recognised as an expense during the period and included in cost of sales in the income statement. Accounting policy 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. Critical accounting estimates and judgements - recoverable amount of inventory Management has 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 Group may be exposed to potential additional inventory write-downs in future periods. B3 TRADE AND OTHER PAYABLES Trade payables Other payables Trade and other payables are non-interest bearing. Accounting policy 2017 $'000 181,917 197,823 2016 $'000 188,511 212,079 379,740 400,590 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. 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C. CAPITAL EMPLOYED This section provides additional information regarding lines in the financial statements that are most relevant to explaining the capital investment made that allows the Group to generate its trading performance during the period and liabilities incurred as a result, including the applicable accounting policies applied and significant estimates and judgements made. C1 PROPERTY, PLANT AND EQUIPMENT At 25 July 2015 Cost Accumulated depreciation Net book amount Period ended 30 July 2016 Freehold Freehold Fixtures Plant and works in land buildings and fittings equipment progress $’000 $’000 $’000 $’000 $’000 Total $’000 Capital 9,600 19,500 444,954 - (4,470) (244,071) 408,411 (174,312) 9,394 891,859 - (422,853) 9,600 15,030 200,883 234,099 9,394 469,006 Carrying amount at beginning of period 9,600 15,030 200,883 234,099 9,394 469,006 Additions Transfer between classes Assets written off – cost Assets written off – accumulated depreciation Impairment1 Depreciation charge Exchange differences - - - - - - - - - - - - 3,648 8,103 (16,366) 14,757 (8,338) 2,228 19,845 (2,162) 500 - (488) (33,402) (31,162) - (251) (48) 47,967 53,843 (28,456) - - - - (2 ) (508) (18,528) 15,257 (8,338) (65,052) (301) Carrying amount at end of period 9,600 14,542 169,034 223,300 28,903 445,379 At 30 July 2016 Cost Accumulated depreciation and impairment Net book amount Period ended 29 July 2017 9,600 19,500 440,088 428,274 28,903 926,365 - 9,600 (4,958) 14,542 (271,054) (204,974) - (480,986) 169,034 223,300 28,903 445,379 Carrying amount at beginning of period 9,600 14,542 169,034 223,300 28,903 445,379 Additions Transfer between classes Assets written off – cost Assets written off – accumulated depreciation Impairment1 Depreciation charge Exchange differences - - - - - - - - - - - - 18,000 16,558 (3,725) 3,515 (4,542) 13,450 16,385 (7,525) 5,197 - (488) (33,333) (29,199) - (302) (47) 53,967 (33,077) - - - - (2 ) 85,417 (134) (11,250) 8,712 (4,542) (63,020) (351) Carrying amount at end of period 9,600 14,054 165,205 221,561 49,791 460,211 At 29 July 2017 Cost 9,600 19,500 470,619 450,537 49,791 1,000,047 Accumulated depreciation and impairment - (5,446) (305,414) (228,976) - (539,836) Net book amount 9,600 14,054 165,205 221,561 49,791 460,211 1. Impairment relates to assets associated with store closures, store and distribution centre optimisation and support office onerous lease provision. Refer to note A3 for more information. 72 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C1 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Accounting policy 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 the cost net of their residual values, over their estimated useful lives, as follows: > Buildings > Fixtures and fittings 40 years (2016: 40 years) 3 – 12.5 years (2016: 3 – 12.5 years) > Plant and equipment, including leasehold improvements 10 – 20 years (2016: 10 – 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 (refer to note C2). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C2 INTANGIBLE ASSETS At 25 July 2015 Cost Accumulated amortisation Net book amount Period ended 30 July 2016 Brand names and Goodwill trademarks Software $’000 $’000 $’000 Lease rights $’000 Total $’000 492,131 429,958 236,335 25,786 1,184,210 - (3,683) (123,133) (25,786) (152,602) 492,131 426,275 113,202 - 1,031,608 Carrying amount at beginning of period 492,131 426,275 113,202 Additions Transfer between classes Assets written off – cost Assets written off – accumulated amortisation Amortisation charge3 Exchange differences - - - - - - - - - - (8 ) - 12,011 508 (1,074) 130 (23,483) (21) Carrying amount at end of period 492,131 426,267 101,273 - - - - - - - - 1,031,608 12,011 508 (1,074) 130 (23,491) (21) 1,019,671 At 30 July 2016 Cost Accumulated amortisation Net book amount Period ended 29 July 2017 492,131 429,958 247,759 25,786 1,195,634 - (3,691) (146,486) (25,786) (175,963) 492,131 426,267 101,273 - 1,019,671 Carrying amount at beginning of period 492,131 426,267 Additions1 Transfer between classes Assets written off – cost Assets written off – accumulated amortisation Impairment2 Amortisation charge3 Exchange differences - - - - 7,400 - - - (27,097) (11,714) - - - - 101,273 23,220 134 (2,632) 2,312 - (25,602) (35) Carrying amount at end of period 465,034 421,953 98,670 - - - - - - - - - 1,019,671 30,620 134 (2,632) 2,312 (38,811) (25,602) (35) 985,657 At 29 July 2017 Cost 492,131 437,358 268,445 25,786 1,223,720 Accumulated amortisation and impairment (27,097) (15,405) (169,775) (25,786) (238,063) Net book amount 465,034 421,953 98,670 - 985,657 1. Additions includes the acquisition of the Marcs and David Lawrence brand names. Refer to note G1 for more information. 2. Impairment of the sass & bide goodwill and brand name. Refer below for more information. 3. Amortisation of $25.6 million (2016: $23.5 million) is included in administration and selling expenses in the income statement. 74 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C2 INTANGIBLE ASSETS (CONTINUED) Impairment tests for goodwill and intangibles with an indefinite useful life The goodwill arising on the acquisition of the Myer business amounting to $465 million (2016: $465 million) cannot be allocated to the Group’s individual cash generating units (CGU’s) (the Group’s stores), and hence has been allocated to the Myer business as a whole. Similarly, brand names which have an indefinite useful life and amounting to $402.8 million (2016: $402.8 million) have been allocated to the Myer business as a whole. A separate assessment is also completed over the sass & bide goodwill and brand name. 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 has been determined using a value in use discounted cash flow model. This model uses cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond five-year periods are extrapolated using a terminal growth rate. The key assumptions used in the model are as follows: > discount rate (pre-tax) 14.4% (2016: 14.4%) > terminal growth rate 2.5% (2016: 2.5%) > average EBITDA margin 7% (2016: 7.7%) Management has determined an excess of future cash flows over asset carrying values of the Myer CGU. Management are continually monitoring and responding to the rapidly changing retail environment and update the impact these changes have on key assumptions used to estimate the carrying value of the CGU. During the period, a review of the carrying value of the assets for each Myer store was undertaken and if indicators of impairment are identified, the recoverable amount of these store assets would be determined using a value in use discounted cash flow model. This model uses cash flow projections based on financial budgets approved by management covering a five year period. The key assumptions in the model are consistent with those noted above. Based on this, no indicators of impairment were identified at a Myer store level. sass & bide The goodwill arising on the acquisition of the sass & bide business was $27.1 million (2016: $27.1 million) and the sass & bide brand name, which has an indefinite useful life, was $23.5 million (2016: $23.5 million). The goodwill and brand name cannot be allocated to the individual CGU’s (the sass & bide stores), and hence have been allocated to the sass & bide business as a whole. In testing these assets for impairment, the recoverable amount has been determined using a value in use discounted cash flow model. This model uses cash flow projections based on financial budgets approved by management covering a five year period. During the period, the carrying value of the sass & bide CGU exceed the recoverable amount and an impairment charge of $38.8 million has been recognised in respect of its goodwill ($27.1 million) and brand name ($11.7 million). The key assumptions to which the valuation outcome is most sensitive relates to sales growth and operating gross profit margin. Given sass & bide’s recoverable amount approximates its carrying value, any adverse movements in these key assumptions may lead to further impairment. Accounting policy (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 non-current 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 group 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. (ii) Goodwill Goodwill is measured as described below under business combinations. Goodwill on acquisition of subsidiaries is included in intangible assets. 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. 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C2 INTANGIBLE ASSETS (CONTINUED) Accounting policy (continued) (iii) Brand names and trade marks The useful life of brands are assessed on acquisition. The brands which are not considered to have foreseeable brand maturity dates have been assessed as having indefinite useful lives as there is a view that there is no foreseeable limit to the period over which key brands are expected to generate net cash inflows for the entity. These brands are therefore not amortised. Instead, these 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. Brands with a limited useful life are amortised over five years using the straight-line method and are carried at cost less accumulated amortisation and impairment losses. (iv) 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 five to 10 years. (v) 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. 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 identifiable net assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value 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, 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. Critical accounting estimates and judgements - impairment The Group tests annually whether goodwill and indefinite lived intangibles have suffered any impairment, in accordance with the accounting policy noted above. The recoverable amount of cash generating units have been determined based on value-in-use calculations at a store level. Goodwill and certain intangibles are tested for impairment at the level of the Group as a whole, using calculations based on the use of assumptions. 76 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C3 PROVISIONS Current Employee benefits Support office onerous lease (i) Restructuring (ii) Workers' compensation (iii) Sales returns (iv) Other Non-current Employee benefits Support office onerous lease (i) Fixed lease rental increases (v) Other (i) Support office onerous lease 2017 $'000 2016 $'000 48,959 10,359 13,848 10,429 2,249 1,451 87,295 3,869 2,098 7,805 49 56,405 3,185 18,948 10,882 2,030 2,778 94,228 4,317 6,138 9,247 52 13,821 19,754 The support office onerous lease provision relates to excess office space identified, due to changes completed during the period and prior periods, and is estimated based on the discounted future contractual cash flows under a non-cancellable lease expiring in 2022, net of future expected rental income. Refer to note A3 for more information. (ii) Restructuring The restructuring provision relates to redundancy costs associated with restructuring of our store labour force and the costs associated with the implementation of our store and distribution centre optimisation program committed but not yet paid. Refer to note A3 for more information. (iii) Workers' compensation The amount represents a provision for workers' compensation claims in certain states, for which the Group is self insured. (iv) Sales returns The amount represents a provision for expected sales returns under the Group’s returns policy. (v) 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. Due to the provision for support office onerous lease recognised during the period, a portion of this provision has been written-back to reflect the realigned total future expense expected over the remaining lease term. Refer to note A3 for more information. Movement in provisions Movement in each class of provision during the financial period, other than employee benefits, are set out below: Support office Workers' Sales rental onerous lease Restructuring compensation returns increases $’000 $’000 $’000 $’000 $’000 Other $’000 Total $’000 Fixed lease 2017 Carrying amount at beginning of period Additional provisions recognised Provisions reversed Amounts utilised Carrying amount at end of period 9,323 9,048 - (5,914) 12,457 18,948 9,282 - (14,382) 13,848 10,882 2,565 2,030 2,249 9,247 2,830 53,260 303 15,073 38,520 - - (1,095) - (1,095) (3,018) (2,030) (650) (16,403) (42,397) 10,429 2,249 7,805 1,500 48,288 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C3 PROVISIONS (CONTINUED) Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes accrued annual leave and long service leave. For long service leave it covers all unconditional entitlements where employees have completed the required period of service. The entire annual leave amount and current portion of the long service leave provision is presented as current since the Group does not have an unconditional right to defer settlement for any of these obligations. However, based on past experience, the Group does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken or paid within the next 12 months. Current long service leave obligations expected to be settled after 12 months 2017 $’000 2016 $’000 20,635 23,610 Accounting policy 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. 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 corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. 78 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 C3 PROVISIONS (CONTINUED) Accounting policy (continued) (iii) 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. (iv) 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. C4 DEFERRED INCOME Current Lease incentives and contributions Non-current Lease incentives and contributions 2017 $'000 2016 $'000 9,817 10,812 75,927 85,744 69,702 80,514 During the period, an onerous lease provision was recognised relating to further surplus support office space identified under a non- cancellable lease. This lease agreement included cash landlord contributions that the Group recorded as deferred income and has been amortising on a straight line basis over the term of the lease. The deferred income relating to the onerous space has been written-back as part of the net support office onerous lease expense. Refer to note A3 for more information. Accounting policy A number of lease agreements for stores include cash contributions provided by the lessor for fit-outs as a lease incentive or lease contribution. The asset additions from the fit-outs completed are recognised as fixtures and fittings at cost and depreciated on a straight-line basis over the asset’s useful life. The lease incentive or lease contribution is presented as deferred income and reversed on a straight-line basis over the lease term. 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 D. NET DEBT This section provides additional information regarding lines in the financial statements that are most relevant to explaining the net debt position and structure of the Group’s borrowings for the period, which are key to financing the Group’s activities both now and for the future. The net debt of the Group as at 29 July 2017 and 30 July 2016 is as follows: Total borrowings Less: cash and cash equivalents Net debt D1 CASH AND CASH EQUIVALENTS Cash on hand Cash at bank Accounting policy 2017 $'000 143,367 (30,591) 112,776 2017 $'000 2,824 27,767 30,591 2016 $'000 147,273 (45,207) 102,066 2016 $'000 2,800 42,407 45,207 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. D2 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2017 2016 52 weeks 53 weeks $'000 11,939 133,853 (436) 1,094 1,782 1,176 1,338 329 5,720 28,449 (4,079) 2,281 (15,880) (5,406) (12,679) (203) $'000 60,543 93,896 (906) 1,094 1,080 620 - (221) (3,457) (14,622) (6,792) 5,717 (964) 6,521 7,057 (76) 149,278 149,490 Profit for the period Depreciation, amortisation and impairment, including lease incentives and contributions Interest income Interest expense Share-based payments expense Share of net (profit)/loss of equity-accounted associate Dilution of investment in equity-accounted associate Net exchange differences Change in operating assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Decrease/(increase) in deferred tax asset Decrease/(increase) in derivative financial instruments (Decrease)/increase in trade and other payables (Decrease)/increase in current tax payable (Decrease)/increase in provisions (Decrease)/increase in other liabilities Net cash inflow from operating activities 80 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 D3 BORROWINGS (a) Structure of debt The debt funding of the Group at 29 July 2017 comprised of a revolving cash advance syndicated facility of $500 million, which contains three tranches. This facility was established on 29 October 2009, drawn down on 6 November 2009 and amended and restated on 3 June 2011, 9 July 2013 and 23 June 2015. At balance date the following amounts were drawn: Bank loans Less: transaction costs Borrowings 2017 $'000 2016 $'000 145,000 150,000 (1,633) 143,367 (2,727) 147,273 The terms and conditions of the Group's revolving cash advance facility is as follows: Revolving cash advance facility - Tranche A Revolving cash advance facility - Tranche B Revolving cash advance facility - Tranche C Amount $145 million $80 million $275 million Term 4 years 2 years 4 years Expiry date 21 August 2019 21 August 2017 21 August 2019 During the period ended 29 July 2017, the Tranche B component of the revolving cash advance facility was reduced from $180 million to $80 million resulting in the total facility reducing from $600 million to $500 million. Subsequently on 21 August 2017, Tranche B has expired and the total facility has reduced to $420 million. As the facility is revolving, amounts repaid may be redrawn during their terms. (b) Security The revolving cash advance facility in place at 29 July 2017 is unsecured, subject to various representations, undertakings, events of default and review events which are usual for a facility of this nature. (c) Fair value The fair value of existing borrowings approximates 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 E1. Accounting policy 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. 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. 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E. RISK MANAGEMENT This section provides information relating to the Group’s exposure to various financial risks, how they could affect the Group’s financial position and performance and how these risks are managed. E1 FINANCIAL RISK MANAGEMENT The Group's activities expose it to a variety of financial risks: market risk (including currency risk, 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, Group policy is to enter into forward exchange contracts in relation to the Group’s overseas purchases for any 18-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 0 – 100% depending on the period to maturity (up to 18 months). The Group's exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Trade payables Forward exchange contracts Group sensitivity USD $’000 16,770 163,851 2017 EURO $’000 540 7,773 NZD $’000 43 - USD $’000 11,147 209,151 2016 EURO $’000 413 12,587 NZD $’000 121 - The Group applies a prudent cash flow hedging policy approach whereby all forward exchange contracts in relation to the Group's overseas purchases are designated as cash flow hedges at inception. Subsequent testing of effectiveness ensures that all effective hedge movements flow through the cash flow hedge reserve within equity. Consistent with this approach, the sensitivity for movements in foreign exchange rates for US dollar and Euro denominated financial instruments held at 29 July 2017, as detailed in the above table, will flow through equity and will therefore have minimal impact on profit. Other components of equity would have been $12.1 million lower/$14.8 million higher (2016: $16.6 million lower/$20.2 million higher) had the Australian dollar strengthened/weakened by 10% against the US dollar and Euro, 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. 82 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E1 FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Market risk (continued) (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 risk is managed by the use of floating to fixed interest rate swap contracts and the Group policy is to fix the rates between 0 and 50% of its average gross debt. This policy applied for the entire period with the exception of the period from 23 September 2015 until 22 August 2016 where the policy was temporarily increased to 0 – 80% to accommodate for the reduction in average gross debt due to the proceeds received from the entitlement offer. The level of fixed interest rate swaps reduced by $50 million due to contract expiry on 22 August 2016, at which point the temporary policy extension has ended and the policy has returned to 0 – 50%. 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. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed 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: Bank loans - variable Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2017 Weighted average interest rate % 3.0% 5.2% 2016 Weighted average interest rate % 3.1% 4.8% Balance $’000 145,000 (100,000) 45,000 Balance $’000 150,000 (150,000) - The weighted average interest rates noted above for both borrowings and swaps are inclusive of margins applicable to the underlying variable rate borrowings. An analysis by maturities is provided in section (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 29 July 2017, if interest rates had changed by +/- 10% from the period end rates with all other variables held constant, the impact on post-tax profit for the period would have been $0.1 million (2016: nil), mainly as a result of higher/lower interest expense on borrowings. Other components of equity would not be impacted (2016: $0.2 million higher/$0.2 million lower) as a result of an increase/decrease in the fair value of the cash flow hedges of borrowings. The range of sensitivities has 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 B1, D1 and E2. 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. 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E1 FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Credit risk (continued) Cash at bank and short term bank deposits AAA AA A Derivative financial assets AAA AA A (c) Liquidity risk 2017 $'000 2016 $'000 - - 30,591 45,207 - - 30,591 45,207 - - - - - 431 - 431 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) Refer to note D3 for more information. 2017 $'000 2016 $'000 - - 355,000 450,000 355,000 450,000 84 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E1 FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Liquidity risk (continued) 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. Between Between Total Carrying amount Less than 6 months $'000 6 - 12 months $'000 1 and 2 2 and 5 Over 5 contractual (assets)/ years $’000 years $’000 years cash flows liabilities $’000 $'000 $'000 Contractual maturities of financial liabilities 2017 Non-derivatives Non-interest bearing Variable rate Total non-derivatives Derivatives 286,113 46,543 332,656 - 1,537 1,537 - 51,941 51,941 - 50,391 50,391 Net settled (interest rate swaps) 595 91 147 Gross settled - (inflow) - outflow Total derivatives 2016 Non-derivatives Non-interest bearing Variable rate Total non-derivatives Derivatives (83,949) 89,230 5,876 (57,827) (20,170) 61,258 3,522 21,137 1,114 292,772 2,304 295,076 - 2,127 2,127 - 151,064 151,064 Net settled (interest rate swaps) 1,094 1,018 525 Gross settled - (inflow) - outflow Total derivatives (d) Fair value measurements (118,488) 124,198 6,804 (71,747) 72,639 1,910 (25,369) 25,593 749 34 - - 34 - - - - - - - - - - - - - - - - - - - - - 286,113 286,113 150,412 145,000 436,525 431,113 867 527 (161,946) 171,625 10,546 - 8,375 8,902 292,772 292,772 155,495 150,000 448,267 442,772 2,637 2,689 (215,604) 222,430 9,463 (431) 7,257 9,515 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). 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E1 FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Fair value measurements (continued) The following tables present the Group's assets and liabilities measured and recognised at fair value at 29 July 2017 and 30 July 2016: 2017 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging Total liabilities 2016 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 - - - - - - - - - - 8,902 8,902 431 431 9,946 9,946 - - - - - - - - - - 8,902 8,902 431 431 9,946 9,946 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 which maximise the use of observable market data and rely as little as possible on entity-specific estimates. 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 derivative financial instruments are included in level 2 as the significant inputs to fair value the instruments are observable. 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. Accounting policy 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 (refer to note B1). (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. 86 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E1 FINANCIAL RISK MANAGEMENT (CONTINUED) Accounting policy (continued) (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 E1. 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. 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E2 DERIVATIVE FINANCIAL INSTRUMENTS Current assets Forward foreign exchange contracts (i) Total current derivative financial instrument assets Non-current assets Forward foreign exchange contracts (i) Total non-current current derivative financial instrument assets Current liabilities Forward foreign exchange contracts (i) Interest rate swap contracts (ii) Total current derivative financial instrument liabilities Non-current liabilities Forward foreign exchange contracts (i) Interest rate swap contracts (ii) Total non-current derivative financial instrument liabilities (a) Instruments used by the Group 2017 $'000 2016 $'000 - - - - 7,417 527 7,944 958 - 958 351 351 80 80 6,969 158 7,127 288 2,531 2,819 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 E1). (i) 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 and Euro. 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. (ii) Interest rate swap contracts Bank loans of the Group currently bear an average variable interest rate of 3.00% (2016: 3.09%). It is the Group's 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 69% (2016: 100%) of the Group’s drawn debt facility (refer to note D3 for details of the Group’s borrowings). The notional principal amounts used in the swap agreements match the terms of the debt facilities. Under the swap agreements, the fixed interest rates range between 3.31% and 3.90% (2016: 2.61% and 3.90%) and the variable rates are based on the Bank Bill Swap Rate bid (BBSY Bid). The contracts require settlement of net interest receivable or payable each three 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 the income statement when the hedged interest expense is recognised. In the period ended 29 July 2017, $2.2 million was reclassified in profit and loss (2016: $2.3 million) and included in finance cost. There was no hedge ineffectiveness in the current period. (b) Risk exposures Information about the Group's exposure to credit risk, foreign exchange and interest rate risk is provided in note E1. 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. 88 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 E2 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Accounting policy 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 Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational and financing activities. 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. 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. 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 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. 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 F. EQUITY This section provides additional information regarding lines in the financial statements that are most relevant to explaining the equity position of the Group at the end of the period, including the dividends declared and/or paid during the period. F1 CONTRIBUTED EQUITY Opening balance Shares issued under Entitlement Offer, net of transaction costs1 Shares issued to Myer Equity Plans Trust at market value Treasury shares Opening balance 2017 2016 Number of Number of shares shares 2017 $'000 2016 $'000 821,278,815 585,689,551 779,963 564,258 - 234,661,660 - 927,604 - - 214,583 1,122 821,278,815 821,278,815 779,963 779,963 (4,200) (4,200) (40,625) (39,503) Shares issued to Myer Equity Plans Trust at market value - (927,604) Shares acquired by Myer Equity Plans Trust on market at $1.31 Shares issued under short term incentive plan Shares issued for performance rights granted Closing balance of Treasury shares Closing balance (150,000) 114,617 28,355 (11,228) - - 927,604 (4,200) (40,634) (40,625) 821,267,587 821,274,615 739,329 739,338 - (196) 150 37 (1,122) - - - 1. During September 2015, the Group completed a fully underwritten accelerated pro rata non-renounceable Entitlement Offer resulting in the issue of 234,661,660 new shares at $0.94 per share. The entitlement offer raised $221 million less transaction costs (net of tax) of $6 million. Ordinary shares The ordinary shares issued are fully paid. 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. 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 Equity Incentive Plans. Refer to note H4 for more information. Employee share and option schemes Information relating to the employee share-based payment schemes, including details of shares issued under the schemes, is set out in note H4. Capital risk management The Group’s key objective when managing capital is to minimise its weighted average cost of capital while maintaining appropriate financing facilities. This provides the opportunity to pursue growth and capital management initiatives. In managing its capital structure, the Group also seeks to safeguard its ability to continue as a going concern in order to provide appropriate returns to shareholders and benefits for other stakeholders. 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. Consistent 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. 90 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 F1 CONTRIBUTED EQUITY (CONTINUED) Capital risk management (continued) The gearing ratios at 29 July 2017 and 30 July 2016 were as follows: Total borrowings (note D3) Less: cash and cash equivalents (note D1) Net debt Total equity Total capital Gearing ratio 2017 $'000 143,367 (30,591) 112,776 2016 $'000 147,273 (45,207) 102,066 1,072,868 1,107,765 1,185,644 1,209,831 9.5% 8.4% The increase in the gearing ratio during 2017 was primarily driven by an increase in net debt and a decrease in equity associated with dividends paid during the year being higher than profits following the decline in profit for the year. Accounting policy 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. 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 F2 RETAINED EARNINGS AND RESERVES (a) Retained earnings Movements in retained earnings were as follows: Balance at beginning of period Profit for the period Dividends Balance at end of period (b) Reserves Share-based payments (i) Cash flow hedges (ii) Other reserve (iii) Foreign currency translation (iv) Movements in reserves were as follows: Share-based payments Balance at beginning of period Share-based payments expense recognised (note H4) Income tax (note A4) Balance at end of period Cash flow hedges Balance at beginning of period Net gain/(loss) on revaluation Transfer to net profit 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 (i) Share-based payments 2017 $'000 2016 $'000 379,483 335,366 11,939 (49,276) 60,543 (16,426) 342,146 379,483 27,186 (6,894) (25,621) (3,278) (8,607) 25,613 1,782 (209) 27,186 (7,441) (1,632) 2,179 (6,894) (3,607) 329 (3,278) 25,613 (7,441) (25,621) (3,607) (11,056) 24,857 1,080 (324) 25,613 7,045 (21,512) 7,026 (7,441) (3,386) (221) (3,607) The share-based payments reserve is used to recognise the fair value of options and rights granted to employees under the employee share plans. Further information on share-based payments is set out in note H4. (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 E2. Amounts are recognised in the income statement when the associated hedged transaction affects profit or loss. (iii) Other reserve Under the shareholders' agreement entered into with the non-controlling shareholders at the time of acquisition in 2011, the Group held 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 had a corresponding put option. These options became exercisable in 2014, two 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 was 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 resulted in the recognition of an amount to the other reserve within shareholders' equity and a financial liability within non-current liabilities other, reclassified to current liabilities in 2013 when it became payable. On acquisition of the remaining 35% of sass & bide, the cash payment of $33.4 million was recorded against the current financial liability and non-controlling interests balances were recorded against other reserve. 92 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 F2 RETAINED EARNINGS AND RESERVES (CONTINUED) (iv) Foreign currency translation Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income and accumulated in a separate reserve within equity. The cumulative amount is reclassified to the income statement when the net investment is disposed of. Accounting policy (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 generally recognised in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges. 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 the rates prevailing on the transaction dates; and > all resulting exchange differences are recognised in other comprehensive income. On consolidation, when a foreign operation is sold, the associated exchange difference is reclassified to profit or loss, as part of the gain or loss on sale. 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 F3 DIVIDENDS (a) Ordinary shares Final fully franked dividend for the period ending 30 July 2016 of 3.0 cents (25 July 2015: nil) per fully paid share paid 10 November 2016 Interim fully franked dividend for the period ended 29 July 2017 of 3.0 cents (2016: 2.0 cents) per fully paid share paid 4 May 2017 (2016: 5 May 2016) Total dividends paid (b) Dividends not recognised at the end of the reporting period The directors have determined the payment of a final dividend of 2.0 cents (2016: 3.0 cents) per fully paid ordinary share fully franked based on tax paid at 30% payable on 9 November 2017 The aggregate amount of the proposed dividend expected to be paid after period end, but not recognised as a liability at period end, is: (c) Franked dividends 2017 $'000 2016 $'000 24,638 - 24,638 49,276 16,426 16,426 16,426 24,638 The franked portions of the final dividends recommended after 29 July 2017 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 2018. Franking credits available for subsequent financial periods based on a tax rate of 30% (2016: 30%) 32,690 28,585 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 $7 million (2016: $11 million). Accounting policy 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. 94 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G. GROUP STRUCTURE This section summarises how the Group structure affects the financial position and performance of the Group as a whole. G1 SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described below: Name of entity NB Elizabeth Pty Ltd NB Russell Pty Ltd NB Lonsdale Pty Ltd NB Collins Pty Ltd Warehouse Solutions Pty Ltd Myer Group Pty Ltd Myer Pty Ltd Myer Group Finance Limited The Myer Emporium Pty Ltd ACT Employment Services Pty Ltd Myer Employee Share Plan Pty Ltd Myer Travel Pty Ltd Myer Sourcing Asia Ltd Shanghai Myer Service Company Ltd Boogie & Boogie Pty Ltd sass & bide Pty Ltd sass & bide Retail Pty Ltd sass & bide Retail (NZ) Pty Ltd sass & bide UK Limited sass & bide USA inc. sass & bide inc. FSS Retail Pty Ltd Country of incorporation Class of shares Notes (1 ), (3 ) (2 ), (3 ) (2 ), (3 ) (1 ), (3 ) (2 ), (3 ) (1 ), (3 ) (1 ), (3 ) (1 ), (3 ) (2 ), (3 ) (2 ) (2 ) (2 ) (1 ), (3 ) (1 ), (3 ) (1 ), (3 ) (2 ), (3 ) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Hong Kong China Australia Australia Australia Australia United Kingdom USA USA (2 ), (3 ) Australia Equity holdings(4) 2017 Equity holdings(4) 2016 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary (1) Each of these entities has been granted relief from the necessity to prepare financial statements in accordance with ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. (2) Each of these entities is classified as small proprietary and therefore relieved from the requirement to prepare and lodge financial reports with ASIC. (3) Each of these entities is party to a deed of cross guarantee, refer to note G2. (4) The proportion of ownership interest is equal to the proportion of voting power held. Business combination On 12 April 2017, FSS Retail Pty Ltd (FSS) completed an asset acquisition with the appointed administrators of M. Webster Holdings Pty Limited (Webster), a fashion retailer selling the Marcs and David Lawrence brands in the Australian market. The acquisition included the brands, intellectual property, fixed assets and inventory relating to Marcs and David Lawrence and supports the Group’s ongoing wanted brands strategy. The issued share capital of Webster was not acquired, however the acquisition met the definition of a business combination. The net assets were acquired for a net consideration totalling $11.9 million, with $13 million fully paid in cash less monies owed from Webster. The fair value of the net assets recognised as a result of the acquisition is $11.9 million, including the Marcs and David Lawrence brand names of $7.4 million (refer to note C2) and a deferred tax liability of $2.2 million recognised for the Marcs and David Lawrence brands acquired (refer to note A4). From the date of acquisition, the contribution from FSS to the net profit after-tax of the Group and the direct costs relating to the acquisition were not significant. 95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G1 SUBSIDIARIES (CONTINUED) Accounting policy The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Myer Holdings Limited (‘Company’ or ‘parent entity’) as at 29 July 2017 and the results of all subsidiaries for the period then ended. Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the 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 to note C2). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of 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, balance sheet and statement of changes in equity respectively. Employee Share Trust The Group has formed the Myer Equity Plans 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. Shares in Myer Holdings Limited held by the trust are disclosed as treasury shares and deducted from contributed equity. G2 DEED OF CROSS GUARANTEE The following entities are parties to a deed of cross guarantee under which each company guarantees the debts of the others: > Myer Holdings Limited > NB Elizabeth Pty Ltd > NB Russell Pty Ltd > Myer Group Pty Ltd > NB Lonsdale Pty Ltd > NB Collins Pty Ltd > Myer Group Finance Limited > The Myer Emporium Pty Ltd > Boogie & Boogie Pty Ltd > sass & bide Pty Ltd > sass & bide Retail Pty Ltd > sass & bide Retail (NZ) Pty Ltd > Warehouse Solutions Pty Ltd > FSS Retail Pty Ltd > Myer Pty Ltd By entering into the deed, the wholly-owned entities with note reference 1 in note G1 have been relieved from the requirements to prepare a financial report and directors' report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. The above companies represent a 'closed group' for the purposes of the ASIC Legislative Instrument, 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'. 96 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G2 DEED OF CROSS GUARANTEE (CONTINUED) (a) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained earnings Set out below is a consolidated income statement, statement of comprehensive income and a summary of movements in consolidated retained earnings for the closed group for the year ended 29 July 2017: Income statement Total sales value Concession sales Sale of goods Sales revenue deferred under customer loyalty program Revenue from sale of goods Other operating revenue Cost of goods sold Operating gross profit Other income Selling expenses Administration expenses Share of net profit/(loss) of equity-accounted associate Dilution of investment in equity-accounted associate Restructuring and store exit costs, onerous lease expense and impairment of assets Earnings before interest and tax Finance revenue Finance costs Net finance costs Profit before income tax Income tax expense Profit for the period attributable to Deed of Cross Guarantee group Statement of comprehensive income Profit for the period Other comprehensive income Items that may be reclassified to profit or loss: Cash flow hedges 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 retained earnings Opening balance Profit for the period Dividends paid Closing balance 2017 2016 52 weeks 53 weeks $’000 $’000 3,201,427 3,288,717 (701,678) (610,553) 2,499,749 2,678,164 (34,847) (38,861) 2,464,902 2,639,303 176,487 161,689 (1,423,209) (1,527,069) 1,218,180 1,273,923 - (819,100) (292,178) (1,176) (1,338) (65,615) 38,773 436 (11,259) (10,823) 27,950 (17,520) 10,430 68 (841,199) (317,975) (620) - (18,250) 95,947 905 (15,447) (14,542) 81,405 (20,146) 61,259 10,430 61,259 547 (180) - 367 10,797 386,254 10,430 (49,276) (14,486) 1,832 - (12,654) 48,605 341,421 61,259 (16,426) 347,408 386,254 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G2 DEED OF CROSS GUARANTEE (CONTINUED) (b) Consolidated balance sheet Set out below is a consolidated balance sheet as at 29 July 2017 of the closed group: ASSETS Current assets Cash and cash equivalents Trade and other receivables and prepayments Inventories Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Derivative financial instruments Investment in associate Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Deferred income Current tax liabilities Derivative financial instruments Other liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred income Deferred tax liabilities Derivative financial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Retained earnings Reserves Total equity 98 Myer Annual Report 2017 2017 $'000 2016 $'000 29,507 38,655 44,306 51,079 369,685 392,441 - 351 437,847 488,177 460,211 445,299 985,263 1,019,111 - - 3,560 80 9,203 3,819 1,449,034 1,477,512 1,886,881 1,965,689 379,233 398,224 87,145 93,998 9,817 1,992 7,944 591 12,114 7,424 7,127 794 486,722 519,681 143,367 147,273 13,772 75,927 86,016 958 19,702 68,401 90,779 2,819 320,040 328,974 806,762 848,655 1,080,119 1,117,034 739,330 739,339 347,408 386,254 (6,619) (8,559) 1,080,119 1,117,034 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G3 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/(loss) for the period Total comprehensive income (b) Guarantees entered into by the parent entity Carrying amount included in current liabilities 2017 $'000 2016 $'000 87,283 149,318 1,013,906 1,076,467 17,713 161,080 27,243 177,047 739,329 739,338 (543) (2,653) 21,320 95,373 (1,253) 909 (2,705) (2,653) 19,538 145,902 7 2,072 - - 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 the deed of cross guarantee. The details of the deed of cross guarantee are set out in note G2. At balance date, no liability has been recognised in relation to these guarantees on the basis that the potential exposure is not considered material. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 29 July 2017 or 30 July 2016. (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 29 July 2017 or 30 July 2016. (e) Event subsequent to balance date Refer to note H6 for additional events which have occurred after the financial reporting date. 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 G3 PARENT ENTITY FINANCIAL INFORMATION (CONTINUED) Accounting policy The financial information that is disclosed for the parent entity, Myer Holdings Limited, has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries Investments 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. G4 EQUITY ACCOUNTED INVESTMENT On 28 September 2015, the Company acquired a 25% interest in an associate entity, Austradia Pty Limited (Austradia). Austradia is an entity domiciled in Australia and holds the franchise rights to TOPSHOP TOPMAN in Australia, including the operation of standalone speciality retail stores as well as concession outlets. On 30 November 2016, the Company's interest in the equity accounted investment decreased from 25% to 20%, as a result of a share issue by Austradia that the Group elected not to participate in, resulting in a $1.3 million loss on dilution of investment. The Group accounts for its investment in associates using the equity accounting method. On 24 May 2017, Austradia appointed administrators and subsequent to this have exited all Myer concession stores and a number of their standalone speciality retail stores. Given this, the carrying value of the investment in Austradia of $6.8 million has been written-down to nil. Refer to note A3 for more information. The Group's share of Austradia's net loss for the period ended 29 July 2017 recognised as part of the equity accounted investment is $1.2 million (2016: $0.6 million). 100 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 H. OTHER INFORMATION This section of the notes includes other information that must be disclosed to comply with the accounting standards and other pronouncements, but that is not immediately related to individual line items in the financial statements. This section also provides information about items that are not recognised in the financial statements as they do not (yet) satisfy the recognition criteria. H1 CONTINGENCIES Contingent liabilities The Group had contingent liabilities at 29 July 2017 in respect of: Guarantees The Group has issued bank guarantees amounting to $36.3 million (2016: $41.3 million), of which $17.6 million (2016: $22.6 million) represents guarantees supporting workers' compensation self insurance licences in various jurisdictions. For information about other guarantees given by entities within the Group, including the parent entity, please refer to notes G2 and G3. Myer Chadstone store On 23 December 2016, legal proceedings were served against Myer Pty Ltd by Perpetual Limited and Bridgehead Pty Ltd, the landlords of the Myer Chadstone store. The proceedings are in relation to alleged unpaid outgoings under the lease provisions of the Myer Chadstone store for the period FY01 to FY16 totalling $19.14 million plus GST, interest and costs. The Group believes the claim has no proper basis, denies any liability under it and will vigorously defend it. Given this, no provision has been recognised at 29 July 2017 in respect of this matter. While the amount and timing of any contingencies are uncertain, no material losses are anticipated in respect of the above contingent liabilities. H2 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 (b) Operating lease commitments The Group leases the majority of its stores and warehouses under non-cancellable operating leases expiring within one to 30 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 2017 $'000 2016 $'000 22,118 9,702 - - - - 22,118 9,702 227,135 817,980 228,574 854,132 1,703,269 1,857,764 2,748,384 2,940,470 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 a percentage of sales revenue and the relevant thresholds vary from lease to lease. A number of lease agreements for stores include cash contributions provided by the lessor for fit-outs and referred to as a lease incentive or lease contribution. Refer to note C4 for more information. 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 H2 COMMITMENTS (CONTINUED) Accounting policy 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. 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. H3 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 G1. (c) Key Management Personnel (i) Compensation Key Management Personnel compensation for the period ending 29 July 2017 is set out below. The Key Management Personnel of the Group are persons having the authority 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 payments Share-based payments 2017 $ 2016 $ 4,859,166 6,157,605 183,825 (280) - 172,387 15,314 - 1,085,146 738,205 6,127,857 7,083,511 Detailed remuneration disclosures are provided in the Remuneration Report on pages 38 to 57. (ii) Loans In 2017 and 2016 there were no loans made to directors of Myer Holdings Limited and other Key Management Personnel of the Group, including their related parties. (iii) Other transactions There were no transactions with Key Management Personnel or entities related to them, other than compensation. (d) Transactions with other related parties There were no transactions with other related parties during the current period. H4 SHARE-BASED PAYMENTS (a) Long Term Incentive Plan The Myer Long Term Incentive Plan (LTIP) is an incentive that is intended to promote alignment between executive and shareholder interests over the longer term. Under the LTIP, performance rights may be offered annually to the Chief Executive Officer and nominated executives. The employees invited to participate in the plan include executives who are considered to play a leading role in achieving the Company’s long term strategic and operational objectives. Each right offered is an entitlement to one fully paid ordinary share in the Company, subject to adjustment for capital actions, on terms and hurdles determined by the Board, including hurdles linked to Company performance and service. 102 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 H4 SHARE-BASED PAYMENTS (CONTINUED) (a) Long Term Incentive Plan (continued) The LTIP is delivered via a grant of performance rights. The number of performance rights that vest is not determined until after the end of the performance period. The performance right will therefore not provide any value to the holder between the date the performance right is granted until after the end of the performance period, and then only if the performance hurdles are satisfied. Performance rights do not carry entitlements to ordinary dividends or other shareholder rights until the performance rights vest and shares are provided. Accordingly, participating executives do not receive dividends during the performance period. Set out below is a summary of performance rights granted under the plan: 2017 Total Balance Expired Balance 30 July 2016 Granted Exercised and lapsed 29 July 2017 6,997,530 4,714,871 (28,355) (1,038,663) 10,645,383 Weighted average exercise price $0.00 $0.00 $0.00 $0.00 $0.00 2016 Total Balance Expired Balance 25 July 2015 Granted Exercised and lapsed 30 July 2016 3,754,563 4,834,991 (927,604) (664,420) 6,997,530 Weighted average exercise price $0.00 $0.00 $0.00 $0.00 $0.00 The weighted average remaining contractual life of share rights outstanding at the end of the period was 1.5 years (2016: 2.9 years). Fair value of performance rights granted The assessed fair value at grant date of rights granted during the period is noted below. Fair value varies depending on the period to vesting date. The fair values at grant dates were independently determined using a Monte Carlo simulation pricing model that takes into account the exercise price, the term of the rights, the impact of dilution, the fair value of shares in the Company at grant date and expected volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the right. The fair values and model inputs for performance rights granted during the period included: (a) Fair value of performance rights granted (b) Grant date (c) Expiry date (d) Share price at grant date (e) Expected price volatility of the Group’s shares (f) Expected dividend yield (g) Risk-free interest rate 2017 LTIP 2017 LTIP 2017 LTIP 2017 LTIP Rights (TSR) $0.84 Rights (EPS) $1.25 Rights (ROFE) $1.25 Rights (Service) $1.34 22-Dec-16 22-Dec-16 22-Dec-16 22-Dec-16 31-Oct-19 31-Oct-19 31-Oct-19 31-Oct-19 $1.37 38% 3.7% 1.96% $1.37 38% 3.7% 1.96% $1.37 38% 3.7% 1.96% $1.37 38% 3.7% 1.96% The expected price volatility is based on the historic volatility (based on the remaining life of the performance rights), adjusted for any expected changes to future volatility due to publicly available information. Where rights are issued to employees of subsidiaries within the Group, the subsidiaries compensate the Company for the amount recognised as expense in relation to these rights. (b) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Rights issued under the LTIP 2017 $’000 1,782 2016 $’000 1,080 Share-based payment transaction expenses represent the amount recognised in the period in relation to share-based remuneration plans. Where expectations of the number of rights expected to vest changes, the life to date expense is adjusted, which can result in a negative expense for the period due to the reversal of amounts recognised in prior periods. 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 H4 SHARE-BASED PAYMENTS (CONTINUED) (b) Expenses arising from share-based payment transactions (continued) Accounting policy Share-based compensation benefits are provided to employees through the Myer Long Term Incentive Plan (LTIP). The fair value of rights 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 rights 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 rights 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 rights 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 LTIP is administered by the Myer Equity Plan Trust (refer to note G1). When rights are vested, 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. H5 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 Other assurance services Audit of rent certificates Total remuneration for audit and other assurance services (ii) Taxation services Tax compliance services (iii) Other services Legal services Total remuneration of PwC Australia (b) Overseas practices of PwC (i) Assurance services Audit services Audit and review of financial statements (ii) Taxation services Tax compliance services Total remuneration for overseas practices of PwC H6 EVENTS OCCURRING AFTER THE REPORTING PERIOD Dividends on the Company's ordinary shares 2017 $ 2016 $ 374,848 594,600 46,002 48,000 420,850 642,600 2,100 2,000 9,026 - 431,976 644,600 65,797 84,617 27,852 93,649 35,314 119,931 The directors have determined to pay a final dividend of 2.0 cents per share, fully franked at the 30% corporate income tax rate, payable on 9 November 2017 for the period ended 29 July 2017. 104 Myer Annual Report 2017 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 I. OTHER ACCOUNTING POLICIES This section provides a list of other accounting policies adopted in the preparation of these consolidated financial statements. Specific accounting policies are disclosed in their respective notes to the financial statements. This section also provides information on the impacts of new accounting standards, amendments and interpretations, and whether they are effective in 2018 or later years. The principal accounting policies adopted in the preparation of these consolidated financial statements ('financial statements' or 'financial report') 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 Limited and its subsidiaries ('Group'). (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Myer Holdings Limited is a for-profit entity for the purpose of preparing the financial statements. Compliance with IFRS 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, except for financial assets and liabilities (including derivative instruments), which have been measured 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 notes A2, B2 and C2. (b) Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191 and, except where otherwise stated, amounts in the consolidated financial statements have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. 105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the period ended 29 July 2017 I. OTHER ACCOUNTING POLICIES (CONTINUED) (c) New accounting standards and interpretations (i) New and amended standards adopted by the Group The Group has applied the following standards and amendments for the first time in the annual reporting period commencing 31 July 2016: > AASB 1057 Application of Australian Accounting Standards > AASB 2014-4 Amendments to Australian Accounting Standards - Clarification of acceptable methods of depreciation and amortisation > AASB 2015-1 Amendments to Australian Accounting Standards - Annual improvements to Australian Accounting Standards 2012-2014 Cycle > AASB 2015-2 Amendments to Australian Accounting Standards - Disclosure Initiative: Amendments to AASB 101 These revised standards did not affect any of the Group's accounting policies or any of the amounts recognised and affected only the disclosures in the notes to the financial statements. (ii) New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 29 July 2017 reporting period. The Group's assessment of the impact of these new standards and interpretations, that were considered relevant for the consolidated entity, is set out below: > AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The standard is not applicable until 1 January 2018. There will be no material 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 Group also does not have any available for sale financial assets. The Group has not yet assessed how its hedging arrangements would be affected by the new rules; however, it does not expect the impact to be material. Increased disclosures may be required in the financial statements. > AASB 15 Revenue from Contracts with Customers is a new revenue recognition standard that's core principle is that revenue must be recognised when the control of goods or services are transferred to the customer, at the transaction price. The standard is not applicable until 1 January 2018 and the Group does not expect the standard to have a significant impact. > AASB 16 Leases was released in February 2016 by the Australian Accounting Standards Board. This standard eliminates the classification between operating and finance leases and introduces a single lessee accounting model. The new model requires the recognition of a leased asset, and its corresponding lease liability, for all leases that have a term of more than 12 months (unless the underlying asset is of low value) and the separate recognition of the depreciation charge on the leased asset from the interest expense on the lease liability. There are also changes in accounting over the life of the lease. This will result in the recognition of a front-loaded pattern of expense for most leases, even when constant annual rentals are paid. The standard is applicable from 1 January 2019 with early adoption permitted if, and only if, AASB 15 is also early adopted. As a lessee with a substantial portfolio of operating leases, the implementation of AASB 16 is expected to have a material impact on the Group's consolidated financial statements at transition and in future years to the extent that leases currently classified as operating leases will need to be brought on balance sheet. In addition, the current operating lease expense recognised in the income statement will be replaced with a depreciation and finance charge. The Group is in the process of performing an assessment of the impact of the new standard and will provide an estimate of the financial impact once complete. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. 106 Myer Annual Report 2017 DIRECTORS’ DECLARATION In the directors’ opinion: (a) the financial statements and notes set out on pages 58 to 106 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 29 July 2017 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 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 G2. Note I.(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 the Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Paul McClintock, AO Chairman Melbourne, 13 September 2017. 107 Independent auditor’s report To the shareholders of Myer Holdings Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Myer Holdings Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group's financial position as at 29 July 2017 and of its financial performance for the period then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • • • • • • • the consolidated balance sheet as at 29 July 2017 the consolidated income statement for the period then ended the consolidated statement of comprehensive income for the period then ended the consolidated statement of changes in equity for the period then ended the consolidated statement of cash flows for the period then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, 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. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters • For the purpose of our audit we • Our audit focused on where Amongst other relevant topics, we communicated the following key audit matters to the Audit, Finance and Risk Committee: • • • • Impairment of intangible assets Accounting estimates and disclosures relating to the New Myer strategy implementation Inventory valuation and provisions Supplier rebates They are further described in the Key audit matters section of our report. the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • The Group is principally involved in retailing through department stores across Australia and online. The accounting processes are structured around a Group corporate finance function at the Group’s support office in Melbourne. • Our audit procedures were mostly performed at the Group support office, along with visits to the Altona Distribution Centre, three department stores across Australia and one sass & bide store to perform audit procedures over inventory. used overall Group materiality of $4.9 million, which represents approximately 5% of the Group’s profit before tax, adjusted for individually material items separately disclosed as restructuring, store exit costs, onerous lease expense and impairment of assets. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group profit before tax and individually material items separately disclosed because, in our view, it is the metric against which the performance of the Group is most commonly measured by users. • We adjusted for individually material items as they are unusual or infrequently occurring items impacting profit and loss. • We selected 5% based on our professional judgement noting that it is also within the range of commonly acceptable profit related materiality thresholds. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters Amongst other relevant topics, we communicated the following key audit matters to the Audit, Finance and Risk Committee: • • • • Impairment of intangible assets Accounting estimates and disclosures relating to the New Myer strategy implementation Inventory valuation and provisions Supplier rebates They are further described in the Key audit matters section of our report. • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • The Group is principally involved in retailing through department stores across Australia and online. The accounting processes are structured around a Group corporate finance function at the Group’s support office in Melbourne. • Our audit procedures were mostly performed at the Group support office, along with visits to the Altona Distribution Centre, three department stores across Australia and one sass & bide store to perform audit procedures over inventory. • For the purpose of our audit we used overall Group materiality of $4.9 million, which represents approximately 5% of the Group’s profit before tax, adjusted for individually material items separately disclosed as restructuring, store exit costs, onerous lease expense and impairment of assets. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group profit before tax and individually material items separately disclosed because, in our view, it is the metric against which the performance of the Group is most commonly measured by users. • We adjusted for individually material items as they are unusual or infrequently occurring items impacting profit and loss. • We selected 5% based on our professional judgement noting that it is also within the range of commonly acceptable profit related materiality thresholds. 109 Key audit matters Key audit matter How our audit addressed the key audit matter including forecast operating margins, discount rate and long term growth rates. • Considered the allocation of the impairment charge to sass & bide assets. We considered the disclosures made in note C2, including those regarding the key assumptions and sensitivities to changes in such assumptions, in light of the requirements of Australian Accounting Standards. Accounting estimates and disclosures relating to the New Myer strategy implementation (refer note A3 and C3) In September 2015 the Group implemented the “New Myer” strategy which involved the execution of a five- year transformation agenda. During FY2017 the execution of the New Myer strategy involved the closure of stores, changes to store sizes following various landlord negotiations, voluntary redundancies and cost reduction within the Group’s support office in • • Melbourne. The FY2017 strategic decisions resulted in restructuring, redundancy, store exits and onerous lease costs of $20 million which were recognised in the period to 29 July 2017 in accordance with Australian Accounting Standards. The restructuring activity was incomplete at period end, with further judgements and assumptions made by the Group regarding the nature and quantum of restructuring activity anticipated in future periods; this activity required the recognition of estimated restructuring and onerous lease provisions of $26 million at 29 July 2017. We considered this a key audit matter because of the judgements and assumptions applied by the Group in estimating the level of provisioning required to be recognised at 29 July 2017. To assess the Group’s accounting policies for calculating the New Myer related provisions we performed the following procedures amongst others: Considered the judgements and assumptions applied by the Group to determine the recognition of provisions based on the status of committed and Board approved strategic action plans. Compared the Group’s judgements and assumptions used to calculate the New Myer provision to: Board minutes landlord agreements - - - - historic data, including prior store closures and restructuring experience other supporting audit evidence. We assessed whether there were other provisions which met the Group’s recognition criteria, and if they had been recognised at 29 July 2017, by making inquiries of management responsible for the New Myer strategy and by reading minutes of Board meetings for the full financial period. We considered the disclosures made in note A3 and C3, in light of the requirements of Australian Accounting Standards. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Impairment of Intangible Assets (refer note C2) As described in note C2 to the financial statements, the Group held $465 million of goodwill and $422 million of brand names and trademarks at 29 July 2017. The goodwill, brand names and trademarks arose on the acquisitions of the Myer, sass & bide and Marcs and David Lawrence businesses. As required by Australian Accounting Standards, the Group assesses annually whether goodwill and other intangible assets that have an indefinite useful life should continue to be recognised or if any impairment is required. Where the carrying value of an intangible asset is higher than its recoverable amount, Australian Accounting Standards require the carrying value of the intangible asset to be written down (impaired). Indicators of impairment identified by the Group during the financial period/at balance sheet date included: • The market capitalisation of the Group (the value of the Group derived by multiplying the number of shares currently issued by the share price at period- end) being lower than the net assets of the Group at 29 July 2017 • The competitive retail environment in which the Group operates. The Group considers the Myer and sass & bide businesses to be two separate cash generating units (CGUs) for the purposes of impairment testing of goodwill and other intangible assets. An impairment assessment was performed by the Group for each CGU. This involved determining the recoverable amount of the intangible assets based on a value in use calculation for each CGU. An impairment of $38.8 million of goodwill and brands was recognised in relation to the sass & bide business. No impairment of Myer’s goodwill or brands was identified. We considered this a key audit matter because of the magnitude of the intangible assets balance and because value in use calculations require significant judgement by the Group in estimating the future trading cash flows of the CGUs. We considered the methodology applied by the Group in performing the impairment assessment and the judgements applied by the Group in determining the CGUs of the business. We considered whether the division of the Group into CGUs, which is the smallest identifiable group of assets that can generate cash inflows, was consistent with our knowledge of the Group’s operations and internal reporting. We developed an understanding of the key relevant internal controls over the impairment assessment process. To assess the Group’s impairment models and calculations we performed the following procedures, amongst others: • Performed testing over the mathematical accuracy of the impairment models. • We compared the discount rate and long term growth rate applied to the impairment assessments for each CGU to our benchmark data. We found the rates utilised by the Group were consistent with our benchmark data. • • • • Compared the Group’s forecast annual growth rates and cash flow forecasts to Board approved budgets and forecasts, externally available economic data and historical actual results. Considered the forecast financial data such as sales, cost of sales, salaries and occupancy costs included in the impairment models, noting the consistency with our knowledge and understanding of the business. Performed sensitivity analysis over the key assumptions including average EBITDA margin, discount rate and long term growth rate to consider the extent of change in those assumptions that either individually or in combination would be required for the intangible assets to be impaired. Evaluated the extent of the sass & bide impairment charge recognised with reference to key assumptions 110 Myer Annual Report 2017 Key audit matter How our audit addressed the key audit matter including forecast operating margins, discount rate and long term growth rates. • Considered the allocation of the impairment charge to sass & bide assets. We considered the disclosures made in note C2, including those regarding the key assumptions and sensitivities to changes in such assumptions, in light of the requirements of Australian Accounting Standards. To assess the Group’s accounting policies for calculating the New Myer related provisions we performed the following procedures amongst others: • • Considered the judgements and assumptions applied by the Group to determine the recognition of provisions based on the status of committed and Board approved strategic action plans. Compared the Group’s judgements and assumptions used to calculate the New Myer provision to: - - - - Board minutes landlord agreements historic data, including prior store closures and restructuring experience other supporting audit evidence. We assessed whether there were other provisions which met the Group’s recognition criteria, and if they had been recognised at 29 July 2017, by making inquiries of management responsible for the New Myer strategy and by reading minutes of Board meetings for the full financial period. We considered the disclosures made in note A3 and C3, in light of the requirements of Australian Accounting Standards. Accounting estimates and disclosures relating to the New Myer strategy implementation (refer note A3 and C3) In September 2015 the Group implemented the “New Myer” strategy which involved the execution of a five- year transformation agenda. During FY2017 the execution of the New Myer strategy involved the closure of stores, changes to store sizes following various landlord negotiations, voluntary redundancies and cost reduction within the Group’s support office in Melbourne. The FY2017 strategic decisions resulted in restructuring, redundancy, store exits and onerous lease costs of $20 million which were recognised in the period to 29 July 2017 in accordance with Australian Accounting Standards. The restructuring activity was incomplete at period end, with further judgements and assumptions made by the Group regarding the nature and quantum of restructuring activity anticipated in future periods; this activity required the recognition of estimated restructuring and onerous lease provisions of $26 million at 29 July 2017. We considered this a key audit matter because of the judgements and assumptions applied by the Group in estimating the level of provisioning required to be recognised at 29 July 2017. 111 Key audit matter How our audit addressed the key audit matter Inventory valuation and provisions (refer note B2) The Group held inventory of $372 million (2016: $396 million) at 29 July 2017. As described in note B2 to the financial statements, inventories are valued at the lower of cost and net realisable value. The Group recognises a provision where it expects the net realisable value of inventory to fall below its cost price. This will occur where inventory becomes aged, damaged or obsolete and will be sold below its cost price in order to clear. Inventory provisioning is also required where inventory no longer exists due to theft and processing errors. We considered this a key audit matter because the Group applies judgements and assumptions in: • • Forecasting sell through rates of inventory on hand at period end to estimate the value of inventory likely to sell below cost in the future. Estimating inventory shrinkage based on actual losses realised as a result of cycle inventory counts. Supplier rebates (refer note B2) As described in note B2 to the financial statements, the Group recognises amounts from suppliers (primarily comprising supplier promotional rebates) as a reduction in the cost of inventory purchased and a reduction in the cost of goods sold. The majority of supplier rebates tend to be small in unit value but high in volume and span relatively short periods of time, although promotional rebates and sell through of related inventory can run across the financial period end. We considered this to be a key audit matter because: • • Supplier arrangements are complex in nature and variable between suppliers. Judgement is needed by the Group to determine the amount of supplier rebates that should be recognised in the income statement and the amounts that should be deferred to inventory. This requires a detailed understanding of contractual arrangements with suppliers and accurate purchase and sell through information. To assess the Group’s judgements and assumptions applied in calculating the value of inventory provisions, we performed the following procedures, amongst others: • • • • Considered the design and effective operation of relevant key inventory controls. Attended inventory counts at a distribution centre and retail stores. Assessed the Group’s inventory provisioning policy by considering the levels of aged inventory and the Group’s inventory clearance strategy. Considered the historical accuracy of the Group’s inventory provisioning by comparing the prior period inventory provision to inventory sold below cost or written off in the current period. We considered the disclosures made in note B2, in light of the requirements of Australian Accounting Standards. Our procedures over supplier rebate income included: • • • Agreeing a sample of supplier rebates recorded to the relevant supplier agreements. Comparing a sample of rebate terms used in the Group’s supplier rebate calculations to relevant supplier arrangements and the Group’s inventory purchase volume data. Interviewing a range of the Group’s buyers to develop an understanding of: - - the nature of the rebates negotiated with suppliers their awareness of company buying policies. We evaluated the recoverability of the rebates receivables at period end by assessing the ageing of amounts outstanding at 29 July 2017. We considered the disclosures made in note B2, in light of the requirements of Australian Accounting Standards. 112 Myer Annual Report 2017 Other information The directors are responsible for the other information. The other information included in the Group’s Annual Report for the period ended 29 July 2017 comprises the Directors’ Report and ASX Additional Information (but does not include the financial report and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report. We expect other information to be made available to us after the date of this auditor’s report, including the Chairman and CEO Report, Performance Review, Company Review, Sustainability Report, Shareholder Information and Corporate Directory. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received as identified above, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. Other information The directors are responsible for the other information. The other information included in the Group’s Annual Report for the period ended 29 July 2017 comprises the Directors’ Report and ASX Additional Information (but does not include the financial report and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report. We expect other information to be made available to us after the date of this auditor’s report, including the Chairman and CEO Report, Performance Review, Company Review, Sustainability Report, Shareholder Information and Corporate Directory. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received as identified above, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. 113 A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 38 to 57 of the Directors’ Report for the period ended 29 July 2017. In our opinion, the remuneration report of Myer Holdings Limited for the period ended 29 July 2017 complies with section 300A of the Corporations Act 2001. Responsibilities 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. PricewaterhouseCoopers Jason Perry Partner Melbourne 13 September 2017 114 Myer Annual Report 2017 SHAREHOLDER INFORMATION As at 27 September 2017. Myer has one class of shares on issue (being ordinary shares). All the Company’s shares are listed on the Australian Securities Exchange. Issued Capital Number of shareholders Minimum parcel price Number 821,278,815 48,946 $0.775 Holders with less than a marketable parcel 17,150 (6,323,415 shares) Distribution of shareholders and shareholdings Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Unmarketable Parcels Units 599,846,009 142,449,431 30,314,837 37,099,269 11,569,269 821,278,815 % 73.04 17.34 3.69 4.52 1.41 100.00 Holders 385 5,081 3,840 16,173 23,467 48,946 % 0.79 10.38 7.85 33.04 47.94 100.00 Minimum $500.00 parcel at $0.775 per unit Twenty largest shareholders Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED PERSHING AUSTRALIA NOMINEES PTY LTD J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMINEES PTY LTD BAINPRO NOMINEES PTY LIMITED GLENN HARGRAVES INVESTMENTS PTY LTD BNP PARIBAS NOMINEES PTY LTD SPACETIME PTY LTD BNP PARIBAS NOMS PTY LTD MR BERNARD JOSEPH BROOKES CS THIRD NOMINEES PTY LIMITED MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED SANDHURST TRUSTEES LTD MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED MR PAT O’NEILL 20 MR BERNARD JOSEPH BROOKES & MRS SUSIE HEIDI BROOKES Total Balance of register Grand total Minimum Parcel Size 646 Holders 17,150 Units 6,323,415 Units % of Units 194,083,938 88,450,664 64,951,084 47,615,413 19,641,026 14,500,122 13,973,451 8,370,293 6,279,879 5,250,000 5,100,000 4,820,000 4,515,390 3,800,000 3,502,354 3,439,212 2,815,000 2,813,194 2,235,790 2,096,060 498,252,870 323,025,945 821,278,815 23.63 10.77 7.91 5.80 2.39 1.77 1.70 1.02 0.76 0.64 0.62 0.59 0.55 0.46 0.43 0.42 0.34 0.34 0.27 0.26 60.67 39.33 100.00 115 SHA REHOLDER INFORMATION Continued Substantial shareholders As at 27 September 2017, there are three substantial shareholders that Myer is aware of: Premier Investments Investors Mutual Dimensional Fund Advisors Total VOTING RIGHTS Date of most recent notice Number of securities 29 March 2017 19 May 2017 2 December 2016 88,450,664 80,897,018 57,539,611 % 10.77 9.85 7.01 27.63 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 and performance rights do not carry any voting rights. OPTIONS AND PERFORMANCE RIGHTS Myer has unlisted performance rights on issue. As at 27 September 2017, there were 16 holders of performance rights. AMERICAN DEPOSITARY RECEIPT PROGRAM Myer Holdings has a Sponsored Level I American Depositary Receipt (ADR) program. Myer ADRs are not listed on an exchange and are only traded in the United States over-the-counter (OTC) market under the code: ‘MYRSY’ and the CUSIP number: 62847V 207. One ADR represents four existing ordinary Myer shares. Deutsche Bank Trust Company Americas (DBTCA) is the Depositary for the Company’s ADR program in the United States. Holders of the Company’s ADRs should deal directly with DBTCA on all matters relating to their ADR holdings on the contact details below: Deutsche Bank Shareholder Services American Stock Transfer & Trust Company Operations Centre 6201 15th Avenue Brooklyn NY 11219 Email: DB@amstock.com Toll-free number: +1 800 937 5449 Direct Dial: +1 718 921 8124 116 Myer Annual Report 2017 CORPOR ATE DIRECTORY REGISTERED OFFICE Myer Holdings Limited Level 7 800 Collins Street Docklands VIC 3008 Phone: 1800 811 611 (within Australia) MYER POSTAL ADDRESS Myer Holdings Limited PO Box 869J Melbourne VIC 3001 COMPANY SECRETARY Richard Amos Chief General Counsel and Group Company Secretary SHAREHOLDER ENQUIRIES: SHARE REGISTRY Link Market Services Limited Postal Address Locked Bag A14  Sydney South NSW 1235 MYER SHAREHOLDER INFORMATION LINE Australian Telephone: 1300 820 260 International Telephone: +61 1300 820 260 Facsimile: 02 9287 0303 www.linkmarketservices.com.au 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 National Corporate Affairs & Communications Manager Phone: +61 (0 ) 3 8667 7019 Email: myer.corporate.affairs@myer.com.au SUSTAINABILITY Miriam Powell National Sustainability Manager Phone: +61 (0 ) 3 8667 7553 Email: sustainability@myer.com.au MYER CUSTOMER SERVICE CENTRE PO Box 869J Melbourne VIC 3001 Phone: 1800 811 611 (within Australia) 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) WEBSITES myer.com.au blog.myer.com.au myerone.com.au myer.com.au/investor FIND US HERE Facebook.com/myer Instagram.com/myer Twitter.com/myer Youtube.com/myer Designed and produced at www.twelvecreative.com.au 117 A N N U A L R E P O R T 2 0 1 7 118 Myer Annual Report 2017 

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