DJs enters a brave new world
By any measure the 13.5 per cent fall in profit was not good - but it was expected to be worse.
Some are even suggesting the company might make up the fall in the current six months and produce a flat result for the year.
David Jones' boss wasn't prepared to speculate on this. The last thing he can afford to do is raise the market's expectations.
Paul Zahra (pictured) already knows the next reporting period will be tough. The company is sacrificing profit to invest in future improvements. The strategy has its risks - the obvious one being the gains won't eventuate. But the chain didn't really have a choice.
Ironically, Zahra has to spend money to save money.
Most of the easy cost-cutting (or the picking of low-hanging fruit) has already been done. If he gets senior management to successfully execute the "Future Strategic Direction" blueprint, one of the company's big costs is a provision to reward them with short and long-term incentives of up to $10 million.
David Jones almost needed the shock of the devastating external retail environment to force it into some of the biggest and most expensive changes the department store has undertaken.
It is now having to pay up to reinvent itself as a new-age retailer.
This is not just about having a functional and appealing website.
That's part of it - and so is striking new deals with its suppliers to bring the cost of products in line with the prices charged on the internet. This is omni-channel and cost-price harmonisation. Half of David Jones' suppliers are now on board with harmonisation and the rest will be dealt with over the coming year. These are the two "musts", without which any discretionary retail business would be in long-term decline.
The other trick - which Zahra is working on - is to make the bricks-and-mortar shopping experience a treat rather than an exercise in frustration. An appealing in-store experience includes plenty of staff, cash registers that are not older than their customers and IT systems that allow plenty of customer data mining.
The introduction of style advisers is long overdue, as was the beefing up of general service levels - but they come at a cost.
It's a big job and it will ultimately require the refurbishment of the entire store fleet.
Zahra suggested that the new-age David Jones may require fewer stores. Over the next five years, six store leases expire, giving David Jones "the opportunity to review its store portfolio in the light of its broader omni-channel retailing strategy".
Myer is also managing down the amount of retail space in response to the internet, but says the number of stores will stay the same. Things can change, however.
Both department stores are working on some churn of their product categories - getting out of some and beefing up others.
David Jones is now moving to allocate 75 per cent of its floor space to higher-margin fashion and beauty, and shrinking homewares to 25 per cent.
The two positive aspects to the David Jones result are sales are only slightly down and, thanks to better deals with suppliers and less discounting to customers, the gross profit margin is much better. (This is the difference between what a retailer pays for its goods and what it sells them for.)
Zahra's next objective is to grab a bigger slice of the home-brand market - developing non-designer apparel and homewares. The profit margin on home-branded goods is about 60 per cent.
Given that David Jones markets itself as a "house of brands", Zahra doesn't want to dwell too much on the home-brand strategy and says that, regardless of its success, he doesn't want these products to make up any more than 10 per cent of sales.
Frequently Asked Questions about this Article…
Analysts upgraded David Jones earnings estimates because the half-year result, while showing a 13.5% fall in profit, was not as bad as feared. Sales were only slightly down and management has delivered better gross margins through improved supplier deals and less discounting, prompting some forecasters to raise full-year expectations.
Profit fell largely because the retailer is investing to transform the business and the external retail environment remains tough. The outcome was better than expected because sales were only slightly down and gross profit margin improved thanks to stronger deals with suppliers and reduced discounting.
Some analysts think David Jones might make up the half-year shortfall in the current six months and deliver a flat full-year result. However, CEO Paul Zahra declined to speculate, noting the company is deliberately sacrificing near-term profit to fund strategic changes and that there is a risk the expected gains may not eventuate.
The 'Future Strategic Direction' is David Jones' reinvention plan to become a new‑age retailer — investing in omni‑channel capabilities, store refurbishments, service upgrades and IT. Those investments carry costs, including a provision of up to $10 million to reward senior management if they successfully execute the plan.
Omni-channel and cost-price harmonisation means aligning in-store and online prices and striking new supplier deals so products cost the retailer the same regardless of channel. About half of David Jones' suppliers are already on board, with the rest expected to be harmonised over the coming year.
David Jones says it may need fewer stores as part of its omni‑channel strategy. Six store leases expire over the next five years, giving management the opportunity to review the store portfolio, potentially close or refurbish sites and optimise physical presence in line with changing customer habits.
David Jones is allocating 75% of its floor space to higher‑margin fashion and beauty and shrinking homewares to 25%. For investors this matters because shifting space toward higher‑margin categories should help improve overall profitability and margins over time.
Paul Zahra wants David Jones to capture a bigger slice of the home‑brand market by developing non‑designer apparel and homewares, where profit margins are around 60%. However, he also says home‑brand products will be kept relatively small, capped at about 10% of sales, consistent with the retailer’s 'house of brands' positioning.
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