THERE was a mix of ugly truth, sleight of hand and sheer faith in the profit recovery plan that David Jones chief executive Paul Zahra unveiled yesterday.
The ugly truth is that the department store is in a hole that will get deeper if it doesn't come up with a recovery plan that works.
The consumer strike that is hitting all retailers, and department stores in particular, is continuing, and DJs is still clearing merchandise that has been stranded. It cut stocks by 3.4 per cent in the January half, which is a good effort. But it still has dud merchandise and it needs to be dumped at profit-strangling prices in the current half before stocks are back to normal.
The 19.6 per cent profit slide that DJs reported for the crucial January half yesterday reflected those trends. Its prediction that earnings would fall by between 35 per cent and 40 per cent in the full-year assumed that they would continue, and also loaded in the initial cost of the group's response to the pressure and an associated downturn in credit card earnings that feeds in from 2014 onwards.
It's an ambitious and complicated plan, involving accelerated investment in retail trading platforms that centre on online trading, heavier investments in back-room technology to pull the department store chain's cost of doing business down, the deployment of more staff in stores despite sales weakness, and a continued program of bricks and mortar expansion, of full-size department stores, and a smaller variation. And to borrow a term that cooking show fans will recognise, it was not plated up brilliantly by Zahra and his team.
DJs made a mistake last year when it decided to ignore analysts' estimates and media reports about the impact of the recasting of its credit card joint venture with American Express in 2014.
Then on Monday this week it suspended trading in its shares, after The Australian Financial Review reported that credit card earnings were expected to halve from 2014 onwards following the termination of a revenue guarantee that American Express gave DJs when it acquired the retailer's credit card receivables in 2008.
DJs suspended its shares not because the report was wrong, but because it wanted to present the news in the context of its strategic response to the earnings threats it faces, and its argument yesterday at a press briefing that the board only confirmed the full extent of the credit card hit at a meeting that began on Tuesday and concluded yesterday morning was hollow. There should already have been guidance on the credit card hit. It's as simple as that.
And while the new strategy and the profit result that shows the need for it were released to the market yesterday, DJs decided that its detailed live briefing would be a selective one, for stockbroker analysts and institutions. Retail shareholders who own about half the group's issued capital missed out, even as Australian Securities and Investments Commission's Greg Medcraft campaigns for better corporate disclosure.
You don't have to look hard for best practice in this area, because it's also common practice. Most listed companies webcast analyst briefings, and give anyone who is interested live access. Given its embrace of the internet culture and the complexity of its makeover, David Jones should have done the same. I am told that consideration is being given to doing so in future.
Financial sleight of hand and DJs' sheer faith that its plan will work was evident in an assertion yesterday that it can be done without busting the bank.
DJs says the recovery plan involves "significant investment" in the next 18 months, but capital expenditure is still budgeted to be between $70 million and $80 million this year, in line with expenditure of just over $80 million in each of last two years.
Earnings will be hit as the plan is rolled out, the group says, but there will be "incremental earnings before interest and tax" in 2014 that will not only offset the cost of the DJs reply, but also cover a halving of credit card earnings before interest and tax from around $49 million to about $25 million from 2014 onwards as the revenue guarantee that American Express committed to in 2008 is replaced by a straightforward revenue sharing arrangement.
DJs says the balancing act in part reflects its ability to fund its plans internally from cash generation, which rose from $133 million to $151 million in the January half, despite the trading downturn, as stocks and the cost of financing them fell.
But the retailer will also be managing a risky shift in capital expenditure away from its stores and towards online platforms, and to hold its capital expenditure budget it is contracting IBM and others to build and, presumably, maintain the new systems it needs. The quid pro quo is that operating expenses will be higher when the systems are up and running.
DJs' prediction that the group will be covering its costs and the credit card income downturn by 2014 also assumes of course that the plan actually works: that DJs will become a successful, internet-integrated retail group.
That's not going to be easy. David Jones is a retailer of high-end branded product, and needs to negotiate with its suppliers for lower wholesale prices if it is to be competitive online without losing earnings. Myer directly sources more of its merchandise, and can tap lower international prices more easily. One question is whether Zahra can maintain the strategy and its deadlines if the deals with suppliers are either slow in coming, or not good enough to protect profit margins.