Fitter DJs is stuck on the starting line

David Jones has made some progress in implementing its smarter, modern, Myer-like strategy but the benefits are yet to flow through to its bottom line.

There is an eerie familiarity within David Jones’ presentation of its first-half results today. Its strategy is near-identical to that of Myer but the smaller department store group is yet to emulate its arch-rival’s modest recovery.

The David Jones result was somewhat better than the market had anticipated but where Myer posted a slight earnings gain after three consecutive quarters of comparable stores sales growth David Jones, with sales still edging down, saw profit slide another 13.5 per cent to $73.5 million, $11.5 million less than the previous corresponding half-year.

That was despite a 110 basis point increase in the group’s gross profit margin, to 39 per cent (against Myer’s 41.21 per cent), although the comparison with the previous period was coloured by the aggressive discounting the group was forced into a year ago after it found itself with substantial excess inventory.

David Jones’ cost-of-doing business rose 8.9 per cent from $281.5 million to $306.5 million, with some of that increase attributable to the investment it is making in the business as it implements its relatively new strategic plan.

That plan is, as indicated, very similar to Myer’s. David Jones is investing more in service, is building an online presence, is negotiating with suppliers for global price harmonisation, is adding to its portfolio of exclusive brands, is taking a tougher line in negotiations with landlords, is lifting the proportion of selling space in its stores and is re-thinking its physical footprint as it builds its omni-channel strategy.

It isn’t a coincidence that the two big department store groups are pursuing similar paths. The models for modern department store retailing are available offshore and, as retail conditions have become tougher in the past few years both groups have had to shift from a simple top-line growth strategy driven by new store openings to a more sophisticated and productive model that includes a push into online channels.

Myer, having invested earlier and more heavily in technology platforms and service, is further down that track than David Jones although the smaller size and narrower focus of the Sydney-based group ought to allow it to catch up.

The online strategy, while still in its earliest phase, appears to be working, with Paul Zahra saying the group’s "webstore" experienced a 288 per cent increase in sales relative to the same period of last financial year and double the total of online sales in all of last financial year. Interestingly, the average order size was three times the value of the average in-store transaction.

David Jones will face a challenge as its financial service joint venture with American Express shifts to a profit-sharing model next financial year and earnings halve, but that has been well flagged to the market.

The group is also looking at ways to add value to the flagship stores that, unlike Myer, it still owns. Those stores have been valued at $612 million.

While David Jones remains committed to owning them, it is looking at whether there is some potential to extract value by redeveloping them and, in particular, exploiting the air space above them, although there is scepticism in the property industry as to whether much value could be extracted. The group is still exploring the options.

The Myer result and Bernie Brookes’ commentary, as well as other data, appeared to indicate that the difficult environment retailers have been experiencing had stabilised and, indeed, had improved slightly in recent months.

David Jones, perhaps because of its positioning at the upper end of the market, or perhaps because the strategy it embarked on last year is still very much a multi-faceted work-in-progress, doesn’t appear to have yet felt any meaningful benefit from the calmer conditions.

Zahra, trying to improve the detail of his business while also grappling with the structural changes occurring within the industry, will be hoping that the tide really has turned and provides a stronger base of earnings and cashflows (down from $150.8 million to $114.3 million) to ease his attempts to transform the group.