Juggling Zahra faces a David Jones tightrope

The signs of a weakening of the mild momentum in retail sales that had developed earlier this year that were evident in Myer’s third-quarter sales numbers last week were far more pronounced in David Jones’ quarterly sales today.

The smaller group’s third-quarter sales were down 2.2 per cent. On a comparable stores basis they were down 3.4 per cent. Myer, at least, managed positive, albeit anaemic, growth of 0.5 per cent for the period.

That David Jones’ sales base should shrink isn’t a shock. There has been a sharp fall-off in consumer confidence since the federal budget, the weather has been unseasonably warm and there continues to be intense competition. Even the latest Reserve Bank rate cut has failed to ease the pressure on retailers.

David Jones’ Paul Zahra has also probably contributed to the decline in his own group’s sales by reducing its levels of promotional activity in an attempt to wean his customer base off the general addiction to discounts as he tries to protect his gross margin and manage inventory with greater discipline.

Whether that trade-off of sales for margin has been effectively managed won’t be clear until David Jones’ has disclosed its full-year earnings. For the first six months of the year the group’s earnings fell 13.5 per cent.

Zahra is still vowing to continue to reduce discounting, saying that he believes the increase in the depth and breadth of discounting in the market is not sustainable and that he did not plan to match the expected discounting activity. Whether or not the discounting is sustainable, David Jones’ top line growth will be impacted if it declines to engage in it.

Myer’s Bernie Brookes referred to the levels of excess inventory in the market last week but he’s been stocking up for massive sales promotions in order to be able to respond to and counter the likely heavy discounting by competitors and to take advantage of the overstocked position of his own suppliers.

There is some anxiety in the sector about Target dumping stock after it recently slashed its earnings guidance by 43 per cent after writing down the value of its stock but the general weakening in the environment probably means that the issue isn’t confined to Target and that the sector generally is carrying too much stock.

Like Myer, David Jones has also responded to shifts within the market and is exiting unprofitable categories like electronics, where the combination of cyclical and structural pressures has been most acute. That cessation of unprofitable sales ought at some point to be reflected in better margins.

The challenge for Zahra is that despite a store network expansion strategy David Jones has been consistently ceding market share in a declining market and posting sales declines despite cycling weak numbers from the previous years’ sales. Myer at least appears to have stabilised its sales base.

Faced with a difficult market and the longer term structural challenge posed by online retailers Zahra is emulating Brookes by investing more in service and systems and ramping up an omni channel offer.

At least he has now rolled out a new point-of-sale system, which should help service levels and the omni channel strategy – David Jones has lagged Myer in the technology stakes. Zahra said online sales growth rates in the third quarter were twice those of the same quarter last year.

Apart from its exclusive brands strategy David Jones has been trying to prepare for a dramatic fall-off in its financial service earnings next year when its previously very profitable alliance with American Express shifts to a profit-sharing joint venture.

Zahra is having to respond to and manage a confluence of major challenges in a quite difficult environment.

With both the big department store groups’ share prices smashed over the past month or so after quite strong surges in the first few months of the year it would appear the market lacks confidence in the ability of either of them to produce respectable outcomes in the current environment.