DAVID Jones investors might get cheques for a dividend of as little as 6? a share for the second half of this financial year, after the company warned of a 35 per cent to 40 per cent profit drop.
That is the minimum amount that DJs' board could elect to pay as a final dividend in August, based on its stated policy of "no less than 85 per cent" of after-tax profit paid to shareholders.
Insider suspects that the DJs' board will, though, opt for a higher payout ratio although basic maths based on the forecast suggest that earnings a share will struggle to top 21? in the full year, which means an absolute best payout of 10.5? in the second half unless DJs' board elects to eat into retained earnings.
Let us face it, though, this year's result was always going to be miserable. The upmarket retailer's chief, Paul Zahra, has clearly decided that he might as well take as many hits on the chin to offset what he already knows will be struggle years in 2013 and 2014.
DJs, like all retailers, hopes that consumers will recover their love of shopping soon, but that is far from a sure bet. So it is forecasting what it calls "moderate growth" next financial year anywhere from zero to 5 per cent would be Insider's guess and wants to bring forward as many nasties to this year's results so it can fulfil that estimate. About the last thing that DJs, or Zahra, need now is to fail to deliver. In 2014, its co-branded credit card venture with American Express becomes a half-share of profits, rather than what have in essence been instalment payments on the 2008 sale of its store card receivables to Amex.
DJs still may have to answer to the corporate watchdog on the question of when it knew that it was going to have to find another $25 million a year of earnings before interest and tax just to tread water because of the Amex deal.
If it delayed confirming six months' of speculation to that effect, by analysts and media, until it had strategies to offset the earnings fall Insider would consider that a sub-optimal choice in an environment in which the Australian Securities and Investments Commission is clearly drawing a line in the sand on the vexed subject of continuous disclosure.
Either way, DJs' earnings in the second half of this financial year, on Insider's extrapolation of the company's guidance, are likely to be a miserable $15 million to $25 million. In the same six months of last year it made $62.4 million. That fall will reflect the cost of clearing excess stocks and administrative staff.
In the first half of the 2010-11 financial year the retailer made $105.7 million. This year it will struggle to earn that in a full year.
Zahra yesterday spent at best the first five minutes of a 90-minute media presentation and question session on 2012 results. The rest was devoted to pitching his three-year strategy, approved by the board on Tuesday, to rapidly shift where and how DJs presents itself to its target market of affluent customers.
Omni-channel retailing and seamless experiences are now omnipresent buzz phrases for retailers describing their future which is not in any way to dismiss the common sense of making your wares available in as many practicable formats as possible to maximise the chance of a sale.
To at least survive, and preferably prosper, DJs and Zahra have little choice but to follow their customers onto the internet and offer them the convenience of stripped-down, smaller format stores close to the homes of cash-rich, time-poor customers.
"Our customers have more information at their finger-tips than our staff do," observed Zahra, who is trying to re-equip, retrain and re-inspire (with extra commissions) his "customer-facing" staff as quickly as sensible.
He also has a cunning, but covert, plan to create 200 "new, innovative frontline service roles" aimed at "differentiated and specialised services", which he politely declined to detail for competitive reasons.
Insider would guess at more personalised shopping and guidance, such as mimicking online shopping by immediately ordering and organising delivery of items not actually in stock when a customer wants them.
Through thick and tin
NINE years on from having his first privatisation of National Can Industries shot down by Raphael Geminder and other parts of the Pratt family empire, Michael Tyrrell has mounted a brave and generous $123 million offer for the company.
In 2003 Geminder bought a blocking stake and stymied the offer.
This time Tyrrell got Geminder to sign a binding agreement on Tuesday to sell his 19.99 per cent stake before the scheme was launched yesterday.
All shareholders in National Can are being offered a way out at $1.84 a share a level not seen for about four years and enough to winkle out Geminder, who bought his initial stake when Tyrrell was bidding only $1.55 a share. Turnover in the shares yesterday soared as investors rushed for exits, happy to take more than $1.70 a share now.
KPMG still has to prepare an independent report, and shareholders will vote in May on the scheme which also needs the corporate watchdog's approval because National Can's balance sheet is helping to finance the privatisation.
The offer is equivalent to 23 times earnings, an extraordinary multiple for a business that (with due respect to the founding Tyrrell family) bangs out bulk paint tins and plastic food pails in a highly competitive market that just happens to include Geminder's Pact Group.
Not only that, the deal will involve putting debt on the National Can balance sheet, and spending its cash reserves, in a time when manufacturing in Australia is seen as a growing graveyard thanks to foreign competition, a shallow domestic market and an unhelpfully high Australian dollar.
Pact's stake in National Can was cited as one of the issues that the Australian Competition and Consumer Commission was weighing in Geminder's bid to acquire the $200 million a year in sales Viscount Plastics.
That has been stalled since late last year. Maybe getting out of National Can will not only deliver Geminder a profit on the shares, but makes his passage through the commission a little easier.
insider@fairfaxmedia.com.au
About the last thing that DJs, or Zahra, need now is to fail to deliver.
Frequently Asked Questions about this Article…
What dividend might David Jones (DJs) pay for the second half of the financial year?
The article says DJs' dividend depends on its policy of paying no less than 85% of after‑tax profit. Because management is forecasting much weaker earnings, that policy could translate into a very small final dividend for the second half (the article even suggested it might be as little as “6” per share, with the original symbol lost in the text). Insiders expect the board may still choose a higher payout or use retained earnings to boost the payment.
Why has David Jones warned of a 35–40% drop in profit?
DJs warned of a 35–40% profit fall because it is clearing excess stock, absorbing administrative staffing costs and facing tough retail conditions. Management is also modelling weak consumer demand and wants to bring difficult items into the current year so future years look stronger.
How will the change to the American Express co‑branded card affect David Jones' earnings?
From 2014 DJs’ co‑branded card deal with American Express will become a half‑share of profits rather than the instalment‑style receipts it has effectively been receiving. The article notes this shift means DJs may need to find about A$25 million a year of earnings to simply tread water, which is a meaningful headwind for profits.
What are market expectations for DJs’ second‑half earnings?
Insider extrapolation of the company’s guidance suggests second‑half earnings are likely to be in the order of A$15 million to A$25 million, compared with A$62.4 million in the same six months last year. The article also notes the retailer made A$105.7 million in the first half of 2010–11 and will struggle to match that in the full current year.
What strategy is David Jones using to respond to changing customer behaviour?
DJs has a three‑year strategy focused on omni‑channel retailing: improving its online presence, offering smaller store formats closer to affluent customers, retraining and re‑equipping customer‑facing staff (including extra commissions), and creating about 200 new frontline service roles aimed at differentiated, specialised customer services.
Is there any regulatory risk around DJs’ disclosure of the Amex change?
The article raises the possibility that DJs may have to answer questions from the corporate watchdog (ASIC) about when it knew the Amex change would remove about A$25 million a year of earnings. If the company delayed confirming that to the market, Insider suggested that could be viewed as a sub‑optimal choice in the current continuous‑disclosure environment.
What is happening with National Can and Michael Tyrrell’s takeover offer?
Michael Tyrrell launched a roughly A$123 million scheme to acquire National Can, and he secured a binding agreement from Raphael Geminder to sell his 19.99% stake before the scheme launched. Shareholders are being offered A$1.84 a share, KPMG will prepare an independent report, shareholders vote in May, and the scheme also needs approval from the corporate watchdog because National Can’s balance sheet helps finance the privatisation.
Is Tyrrell’s National Can offer expensive and what are the potential concerns?
The offer is equivalent to about 23 times earnings, which the article describes as an extraordinary multiple for a manufacturing business like National Can. Concerns highlighted include putting debt onto the company’s balance sheet, spending cash reserves, and doing so at a time when Australian manufacturing faces strong competition, a shallow domestic market and a high currency. Pact Group’s stake and prior competition issues were also mentioned as contextual concerns.
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