Keeping up with the Joneses

The continuing, indeed accelerating, momentum in David Jones' results raises the question of whether it is possible for the two big department store groups to both do well at the same time.

The obvious and potentially quite important corrorally to that question is: if David Jones and Myer can profitably co-exist, would their success come at someone else's expense?

Those longer term questions are posed by David Jones' stellar first-half performance, with sales rising 9.5 per cent and after-tax earnings up between 23 per cent and 25 per cent. Even in the context of still-buoyant retail spending, those are impressive numbers.

The group, which says its trading performance in January and the first two weeks of February remains strong, is maintaining its second-half guidance of an 8 to 13 per cent increase in profit over last year while it waits to see how the year unfolds. The Reserve Bank's statement of intent today – it remains predisposed towards further rate rises – casts a shadow over the outlook for the rest of this year.

David Jones' chief executive, Mark McInnes, credits the surge in recent results not just to good management (although the metrics of David Jones' performance do reflect very good execution of the basics of good retailing) but to a historic divergence of strategies between his group and Myer.

McInnes describes Myer's retail strategy under its new private equity ownership somewhat differently to his counterparts at Myer, Bill Wavish and Bernie Brookes, intimating that they have positioned the new Myer downmarket from where it was. Wavish and Brookes would say they haven't shifted Myer's focus but broadened it to more effectively and clearly offer a full range of price-points. Myer has employed a similar high-end strategy to David Jones.

The identity crisis within Myer that pre-dated its private equity ownership did allow David Jones to clearly define its target market and use its ''house of brands'' strategy to create a very clear perception of its positioning. That strategy, which continues, is a core part of the explanation for its success.

The new Myer has a slightly greater emphasis on private labels, although that represents less than 15 per cent of its range, and appears to have broadened its offering to encroach on the territory of its former siblings, Target and Kmart.

Under the new management Myer has been financially very successful – its owners have already been able to extract all the capital they initially invested plus an extra 25 per cent – but the real challenge will be to generate some sales growth from Myer's $3 billion base and improve gross margins. That will take time.

The new Myer is, however, more disciplined and very focused on the detail of its business. The renegotiation of its terms of trade with its suppliers has been emulated by David Jones and this offers long-term benefits to both groups. Myer's discounting cycle appears more disciplined and less disruptive than it used to be. The redevelopment of the key Bourke Street precinct in Melbourne ought to be very good for both big retailers.

As McInnes says, his business is one with a high fixed cost base and therefore one which is very leveraged to sales growth, as the relationship between sales and profit growth in the first half demonstrates.

Myer has had some difficulty growing its sales base from $3 billion a year, but is now opening new stores even as the new management pores over its cost base searching for savings. It is looking to create the same operational leverage that has powered David Jones' results under McInnes.

If the retail spending boom continues it is conceivable that the two department stores can both fire at the same time without damaging competitors. Sustainable through-cycle growth, however, would presumably need to come at someone's expense.

The most obvious, but not necessarily the most likely, casualties of a resurgence of Myer would be Target and Kmart, now owned by Wesfarmers, and other big discount retailers.

Myer and David Jones started to suffer from relevance deprivation in the 1980s. While Target, Kmart, Big W and other discount retailers might have played a role in the decline in the fortunes of the department store operators in that period, the bigger factor was the rise and rise of the specialty chains.

David Jones' resurgence has been built on devising a very direct response to the specialty store offerings. While Myer's broader offering makes its task somewhat more challenging, in the longer term it, too, needs to win share back from the specialty retailers to create the same kind of virtuous dynamics driving David Jones' performance.