Questions remain over Zahra's hasty exit from David Jones

The stage-managed and neatly packaged explanation of Paul Zahra's impending departure from the top job at David Jones doesn't pass the smell test.
By · 23 Oct 2013
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23 Oct 2013
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The stage-managed and neatly packaged explanation of Paul Zahra's impending departure from the top job at David Jones doesn't pass the smell test.

Six weeks ago Zahra told me over lunch, "I couldn't imagine myself doing anything else because I love the company". Either Zahra's next job is in acting or he did not envisage this week's chief executive "transition". My money is on the latter.

He made similar press comments a week later after he spoke with me. "We have done a lot but there is still more to do," he said.

Chief executive's don't side-swipe investors with a decision like this if they are in control of the timing. Under normal circumstances they (and the board) prepare investors and analysts rather than issuing shock announcements.

It was abundantly clear from talking with investors and reading the reports from investment bank retail analysts (both of which are generally plugged in) that Zahra's news came as a surprise.

To conclude that he was sacked by the board is probably a stretch but to surmise that he decided to leave after some kind of conversation with David Jones chairman, Peter Mason, about his medium-term support as chief executive is more likely. It's probably also a fair bet that Mason and his board don't have another candidate in mind.

Having watched many chief executive transitions and how they are variously sold to investors and the media, the "I need a break" is a departure from the usual script.

Chief executives - even ones like Zahra who were thrust into the job due to unforseen circumstances - don't generally throw up their hands after three years in order to take an extensive vacation.

Mason is a seasoned director and chairman but if he (as I reckon) withdrew wholehearted support for Zahra, he has failed in his task of managing succession. There is no one inside David Jones that is ready to fill Zahra's shoes and no obvious outside replacements.

Former Oroton boss Sally Macdonald, who is potentially in contention when her no-compete handcuffs are removed next February, is the only obvious candidate but I doubt whether she has already been lined up. Mason has also misjudged the support Zahra has garnered over the past year for his strategy, central to which was putting David Jones' digital offer on steroids and ridding the department store of the chronic sales discounting.

Comments from investors were pretty consistent on Tuesday in support of Zahra and his plan for reviving David Jones.

They were generally positive about the full-year 2013 earnings result that was ahead of most expectations.

Over the past three years David Jones has reported consistent falls in revenue and share price and is only now looking at the prospect of earnings growth. The decision is all the more curious because Zahra has only recently being credited for the potential reversal in fortune and he was awarded 88 per cent of his short-term incentive payment, indicating the board was comfortable with his performance. For the first couple of years he operated in the shadow of his predecessor, Mark McInnes, whose departure was the result of his behaviour rather than his performance.

Zahra struggled to convince the market that he had the capability to reshape David Jones into a 21st-century retailer.

The other strange element to this week's announcement was the timing, only a few months off the vital Christmas trading period.

The notes from analysts on Tuesday reflected the understandable sentiment. Credit Suisse noted that the retailer generates approximately 45 per cent (estimated) of annual profit in its second quarter. The sudden resignation of the CEO increases operational risk through this period. It noted that there is now potential for strategic change: including the move to create a new small format, a move to the recently signed concession agreement with Dick Smith Electronics for the sale of consumer electronics products within David Jones stores.

Credit Suisse, along with others, take the view that the online initiatives seem strategically sound, as do the commitment to investment in point-of-sale infrastructure and the move into private label sales.

JPMorgan is one of many that points to the disruption that the announcement of a new CEO will create. "This announcement is a surprise given progress on the future strategic direction plan, according to Citi's Craig Woolford, who described Zahra's move as strange in its timing.

The David Jones share price fell almost 3 per cent in response to the news on a day when the market was up overall.
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