David Jones may have just had a shockingly bad year earnings-wise, but that doesn’t mean there isn’t hope for the future. Fortunately for the retail giant, all eyes were today focused on dissecting its strategy and surprise property update rather than studying the bare numbers (which were dismal as expected).
DJs has worked hard to deliver on its strategic plan, which includes ramping up its online presence, reducing prices across a range of categories and improving the customer experience in-store.
But at the same time, the retail giant disclosed today that it hired property group Cushman & Wakefield to provide an estimate on the potential worth of its premium retail properties and that it plans to further explore the development potential of its property portfolio.
The shock announcement could be an indication that the retail giant is taking precautions in case the sector continues to disappoint, but it also shows the market that the potential worth of the assets is much higher than the book value.
Still, in pushing ahead with its latest strategy, DJs shows it has at least some confidence in its ability to compete in the current environment.
Since unveiling its blueprint for the future earlier this year, DJs has progressed with its plan to become an "omni channel retailer’’ – the goal to complement its "bricks and mortar” business with a strong online presence.
Until now, the retailer’s foray into the online market could be described as tentative at best. But that’s all changed with the rollout of its latest effort, including heavy investment in developing online capabilities.
To illustrate this, we only need to look at its stock-keeping units. Under its old IT system the DJs website was able to offer 9,000 SKUs. By Christmas of this year, and with the help of a new and improved IT platform, it aims to offer 90,000 SKUs. At the same time, Myer’s online rollout to 30,000 SKUs in fiscal 2012.
Another key element of its strategy has been to deliver more cost savings to customers, though the retailer has noted the deflationary pressure on the business due to such price reductions. Still, it’s difficult to imagine how DJs will be able to successfully go up against global competitors on price in the long-term.
DJs has also been working to distance itself from the perceived poor customer service on offer in-store by increasing the number of floor staff and employing a number of "advisors” and "specialists”, while at the same time ramping up customer events and promotions in store. Again, DJs has chosen a similar route to rival Myer, which also invested heavily in improving the customer experience.
Still, this are all run of the mill exercises that retail giants around the world have been doing for the past few years. Even on the domestic level, DJs only had to look as far as Myer to find a half-decent strategic plan on how to compete with a combination of the rise on online shopping and operating in difficult economic conditions.
So while DJs gets brownie points for going full steam ahead on implementing its strategic plan, there’s nothing new to it. In a dramatic contrast to this, the retailer’s property portfolio update was the news of the day.
In its update, DJs flagged that it has begun a review of its four premium properties – two in Sydney and two in Melbourne – to explore potential development opportunities. DJs gave a book value of $450 million for the properties, all of which are based in prime retail locations.
Cushman & Wakefield provided DJs with its assessment of the potential worth of the four buildings, coming up with a figure of $612 million. DJs could potentially lease the properties for a total of $39 million per year, Cushman & Wakefield says.
DJs made it very clear that this was really just a fact-finding mission. The retailer has made no decision on whether or not to sell the properties, but is merely looking to keep its options open. We can expect to find out in six months if there are any plans to proceed with such a move.
Until now, DJs has continuously resisted calls from shareholders to sell the top end properties. The fact that it’s exploring such an option now marks a change of pace for the retailer, and could be linked to the mysterious bid that DJs received from UK company EB Private Equity in July.
In coming out with solid figures for its property assets, DJs makes it clear that the book value of its assets is very different from the worth of the assets.
Still, it can’t be ignored that the move also raises questions over the direction the retailer is taking and the confidence it has in the future of retail.
As more Australians get online and realise the savings that can be made from shopping with online retailers, major department stores like DJs and Myers are likely to be the losers. Even when consumer confidence does pick up – and that’s likely to be in the medium rather than near-term – DJs is fighting a battle that will be difficult to win.
While its strategic plan has brought the company forward, consumers are more cost-conscious than ever, and likely to stay that way. A major problem is that even with a stronger online presence, DJs will find it difficult to compete on price with global online retailers in the long term.
In exploring the potential sale or development of its stores, DJs looks to be hedging its bets in case the retail sector fails to recover. As consumer confidence struggles to rebound, DJs is playing the smart game by keeping its options open and showcasing its strengths to the market.
DJs takes heart from its plan – and its property
David Jones is taking a multi-pronged but hardly revolutionary approach to boosting earnings. At the same time, it is also communicating to the market its understated value as a takeover target.
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