David Jones said it will ramp up private label offerings at its stores over the coming year as it chases higher profit margins rather than top line sales growth.
Improved gross margins were one of the highlights of its first half results issued on Wednesday.
The department store operator reported a double-digit fall in net profit as the cost of its business improvement initiatives collided with flat sales for the six months to January 26.
The shares rose 12¢ to a year's high of $3.08 as the earnings beat the expectations of most analysts. However, David Jones said conditions remained challenging as it reported profit after tax down 13.5 per cent to $73.5 million and sales down slightly to just over $1 billion.
"I would not say we're out of negative territory," said David Jones chief executive Paul Zahra.
He said the company had made "significant progress" on its transformation plan during the period with the successful launch of its new online site in November, and implementation of support infrastructure that includes new point of sales systems in its NSW, Victorian and Queensland stores.
David Jones said it managed to improve its gross profit margin on sales from 37.9 to 39 per cent as a result of reduced discounting and improved trading terms with suppliers.
The company is also exiting low margin categories such as DVDs, music and electronic games, and devoting more floor space to higher margin products that are selling well, including fashion and beauty, which is targeted to take up 75 per cent of the floor space in its stores.
Plans to triple its private label sales to around 10 per cent of overall sales will also help improve gross profit margins, but this will not conflict with its "house of brands" strategy, Mr Zahra said.
He said the strategy was to focus David Jones branded goods on "basic everyday needs" rather than areas that would compete with its brand partners.
On the property front David Jones has appointed CBRE to undertake a review of how the retailer can "extract the maximum value out of its two Sydney CBD assets". This would come from a redevelopment exercise, of adding either a tower of apartments or offices atop the Elizabeth and Market street stores.
David Jones owns the airspace above the Sydney and two Melbourne stores, but said any development exercise was "complex" and would take time.
At the analysts's briefing, the group executive retail services, Anthony Karp, said the company wanted to wait and see how the Barangaroo South development would impact on demand for new apartments and offices in the city's core.
Mr Karp said of the current 37 stores, there were six store lease expires in less robust demographic locations, that would be reviewed and possibly closed in the next five years, mainly in what are considered non-core malls for David Jones.
"These lease expiries give us the opportunity to review our store portfolio in light of our broader, omni-channel retailing," he said.