DJs investors rattle a restless board

The conflation of the issue of directors’ share trading with the foreshadowed departure of David Jones chief executive Paul Zahra is a transparent attempt by some institutional shareholders to put pressure on the battling retailer's board.

The issues are separate, other than that at least one of the directors who bought David Jones shares just ahead of the group’s first quarter sales announcement, Steve Vamos, appears to be one of the non-executives accused by the investors of interfering in management issues.

There appears to be an attempt to use the share purchases as leverage to exert pressure on the board to retain Zahra.

The share trading issue first. Vamos and fellow director Leigh Clapham bought 12,500 and 20,000 David Jones respectively three days before the sales announcement on 1 November, during a period designated by the board as a ‘window’ for directors’ share trades and with the prior approval of the company’s chairman, Peter Mason.

On November 1, David Jones announced that first quarter sales were up 2.1 per cent in total, although down 0.3 per cent on a ‘’like for like’’ or comparable stores basis. The shares had closed at $2.72 on October 31 but spiked to $2.90 the day the sales announcement was made. They are now trading around $3.04.

Could Mason, Vamos or Clapham have reasonably expected that the sales announcement would move the market?

It’s hard to conceive of why they might have, though a single relatively flat sales number would have a material impact. Sharemarket responses to company announcements can often only be interpreted with hindsight.

The Australian Securities and Investment Commission is looking at the directors’ trades and will come to its own conclusions. However, it is obvious that the directors concerned, and Mason, didn’t believe the sales announcement was likely to materially move the market in David Jones shares. There was certainly nothing intentionally improper about the trades.

Paul Zahra announced his resignation as CEO on October 21, with the company’s statement citing ‘’personal reasons’’. Zahra expanded on that in comments to the media, saying that he was ‘’simply tired’’ after three-and-a-half years in the role during a very difficult period for retailers and wanted to rest, travel and then experience some new challenges.

Subsequently, a number of institutional shareholders have been publicly and privately urging Mason and the board to retain Zahra.

There are two problems with that campaign.

One, as Mason has said, is that no public company would ask a CEO to undo a resignation once it had been announced. Taken at face value, Zahra has indicated that he doesn’t have the energy or commitment to continue, so why would the board ask him to rescind the decision?

There are mutterings around the market that Zahra had become frustrated at the intervention of board members in what he considered to be management issues. Even if that were the case, in a dispute between a CEO and a board, the board has to prevail if proper governance is to be maintained.

It is also worth considering that, if a board does ‘’interfere’’ in the management of a company, that generally means it isn’t happy with what’s occurring within the company – which does and should put the CEO in an awkward position.

Zahra is generally credited with having done a pretty good job in difficult circumstances since he became CEO in mid-2010 after the controversy-laden shock exit of Mark McInnes.

The external environment has been very tough for retailers, but most particularly for department store operators. David Jones’ premium market positioning hasn’t helped, nor has the previous lack of investment in point-of-sale technology and online retailing.

Nevertheless, since 2009-10, David Jones has significantly under-performed against its major competitor, Myer.

Over the past three years, David Jones has lost 10 per cent of its sales base; Myer 4.3 per cent. Gross profit has fallen 13.4 per cent at David Jones; 0.8 per cent at Myer. Earnings before interest and tax are down 40 per cent at David Jones; 20 per cent at Myer. Net profit is down 40 per cent; 25 per cent at Myer. David Jones’ share price has fallen 30 per cent over the period, twice as much as Myer’s.

This year David Jones faces another challenge when its financial services alliance with American Express, where previously there were earnings underwritten by Amex, converts to a share of actual underlying profits. The alliance generated $49.5 million of earnings before interest and tax for David Jones last financial year but will roughly halve this year.

In those circumstances, regardless of how well Zahra might have managed in the circumstances, and no matter how well-regarded by the market his management of the business and his strategies might be, it would be understandable if a board were somewhat more restless and active than they might be if the company’s performance had been more robust.

Zahra is staying on until a successor is appointed. If the board can find someone with the right experience and credentials, it would help defuse some of the investor agitation now being experienced.

A new CEO would also have a period of grace and therefore buy the company (and the board) some time to deal with the impact of the new Amex arrangements and the still-challenging external settings, while continuing to implement and perhaps fine-tune the re-positioning strategies Zahra and his board developed.