AN ADMISSION by chief executive Paul Zahra that David Jones was mired in its worst fourth-quarter sales period in more than 20 years prompted panic selling yesterday across all retail stocks.
The investor exodus quickly spread to other retail-exposed sectors.
Shares in David Jones plunged 19 per cent to a two-year low after Mr Zahra detailed what he described as a "dramatic and rapid deterioration" in sales and foot traffic through his stores. This had begun in June and grown worse in the first two weeks of this month.
"We are in a perfect storm," Mr Zahra said at a media conference after releasing David Jones's shock sales and profit downgrade to the sharemarket on Wednesday night, citing a string of problems confronting the company, including the flood levy, the looming carbon tax, higher interest rates and the stronger Australian dollar.
"We saw a decline in May with slight negative sales, but we saw a significant decline in June and July and the results were certainly unprecedented.
"As far back as our records show, we haven't seen these sorts of declines in sales."
Mr Zahra, at times sounding exasperated during the press conference, said consumers remained deaf to some of the massive discounts David Jones was offering to clear its winter stock. Further and deeper sales appear likely to clear the way for spring and summer lines from August 1.
David Jones shares dived as low as $3.17 as investors dumped the stock. They closed down 71?, or 18.2 per cent, at $3.20. The rout slashed $370 million from the fashion company's market capitalisation.
It also dragged down other retailers, including arch rival and the nation's biggest department store owner, Myer, which fell 17?, or 6.4 per cent, to $2.48, despite it yesterday reaffirming its 2010-11 profit guidance in an attempt to quell investor fears.
The selloff extended to companies with any connection to the retail sector. Most of yesterday's worst performers in the S&P/ASX 200 were retail related: JB Hi-Fi lost 5.3 per cent, Harvey Norman 4.6 per cent, and Seven West Media
3.8 per cent.
Mr Zahra particularly singled out the slew of taxes introduced or about to be introduced by the Gillard government for turning his core shoppers away, but said there was a wider malaise infecting most consumers and retailers across the spectrum.
"That aspirational [David Jones] customer has actually stopped shopping and people are just not confident about the year ahead.
"Customers are choosing not to shop, they are saving their money and paying down debt, and there is a real level of uncertainty locally as well as internationally."
But some of the problems facing David Jones appear to be of its own making, with bloated inventory levels going into the June and July clearance sales forcing the company to trigger deeper discounting, which hurt margins.
David Jones warned on Wednesday night that fourth-quarter sales would fall by 11 per cent and net profit in the second half of 2011-12 would be down by 15-20 per cent from 2010-11.
"Things are tough for retail and the David Jones downgrade has reflected that," said Platypus Asset Management portfolio manager Simon Bonouvrie.
"It looks like conditions fell off a cliff in June and July and it went from being flat to negative and I think there are also some specific David Jones issues they have, such as inventory."
Mr Bonouvrie said David Jones probably allowed too much inventory to build up, expecting better trading conditions than it had now struck, meaning it would have to clear more inventory.
"That will put more pressure on their profits."
Mr Zahra said David Jones planned to deal with the excess inventory this year.
"We don't plan to add to our discounting and marketing program," he said. "It just means that our discounts may be deeper as we move into the summer season."
Frequently Asked Questions about this Article…
Why did David Jones shares plunge and how big was the fall?
David Jones shares plunged after CEO Paul Zahra admitted the company was experiencing its worst fourth-quarter sales period in more than 20 years. The stock dived as low as $3.17, closed at $3.20 and fell about 18.2%, wiping roughly $370 million off the company's market capitalisation.
What sales and profit downgrade did David Jones announce?
David Jones warned fourth‑quarter sales would decline by about 11% and said net profit in the second half of 2011‑12 was expected to be 15–20% lower than in 2010‑11, prompting the shock downgrade that spooked investors.
What reasons did CEO Paul Zahra give for the sharp sales deterioration at David Jones?
Paul Zahra described a "perfect storm" of factors: a flood levy, the looming carbon tax, higher interest rates, a stronger Australian dollar and broader consumer uncertainty. He also said customers were saving, paying down debt and becoming less confident, which reduced shopping.
How did David Jones’ inventory levels contribute to the problem?
The article reports David Jones had built up bloated inventory going into June and July clearance sales. That forced deeper discounting to clear stock, which hurt margins and put more pressure on profits.
How did the David Jones downgrade affect other retail stocks and the wider market?
The investor exodus spread quickly across retail-exposed sectors. Rival Myer fell about 6.4% to $2.48 (despite reaffirming guidance), while other retail-related S&P/ASX 200 losers included JB Hi‑Fi (‑5.3%), Harvey Norman (‑4.6%) and Seven West Media (‑3.8%).
What short‑term actions did David Jones plan to take to clear excess stock?
David Jones said it planned to clear excess winter inventory with further and potentially deeper sales, making way for spring and summer lines from August 1. Management said it would not add to its discounting and marketing program but acknowledged discounts may be deeper into the summer season.
What did industry commentators say about the retail conditions behind the rout?
Platypus Asset Management portfolio manager Simon Bonouvrie said trading conditions appeared to fall off a cliff in June and July and highlighted company-specific issues at David Jones such as excess inventory, which would put extra pressure on profits.
As an everyday investor, what should I take away from this David Jones story about retail risk?
The article highlights how a steep sales downgrade at one major retailer can trigger broad sell‑offs in retail‑exposed stocks. Key takeaways are to watch company guidance, inventory levels and consumer confidence indicators, since those factors drove the David Jones shock and wider retail weakness described in the article.
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