David Jones will increase its private-label offerings 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. But the company 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, but 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 more than $1 billion.
"I would not say we're out of negative territory," David Jones chief executive Paul Zahra said.
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-sale systems in its NSW, Victorian and Queensland stores.
David Jones said it had improved its gross profit margin on sales from 37.9 to 39 per cent due to reduced discounting and improved trading terms with suppliers.
The company is also exiting low-margin categories like DVDs, music and electronic games, and devoting more floor space to higher-margin products that are selling well, such as fashion and beauty, which are targeted to take up 75 per cent of the floor space in its stores. Plans to triple its private-label sales to about 10 per cent of overall sales will help improve gross profit margins, but this will not conflict with its "house of brands" strategy, according to Mr Zahra.
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 apartments or offices atop the Elizabeth and Market street stores.
Davis Jones owns the airspace above the Sydney and two Melbourne stores, but said any development exercise was "complex" and would take time.
At the briefing, group executive of retail services Tony Karp said the company wanted to wait and see what impact the Barangaroo South development had on demand for new apartments and offices in the city's core.
Of the 37 stores, Mr Karp said, six store leases were set to expire in less robust demographic locations that would be reviewed and possibly closed in the next five years. They are mostly in what are considered non-core malls for DJs.
"These lease expiries give us the opportunity to review our store portfolio in light of our broader, omni-channel retailing," Mr Karp said.