Search to replace CEO could disrupt strategy

The search for a new chief executive to lead upmarket department store David Jones would likely disrupt the retailer's progress to transform into a successful omni-channel business and comes just as the business enters a key trading period responsible for nearly half its annual profit, analysts say.

The search for a new chief executive to lead upmarket department store David Jones would likely disrupt the retailer's progress to transform into a successful omni-channel business and comes just as the business enters a key trading period responsible for nearly half its annual profit, analysts say.

Recent gains in like-for-like store sales recorded in the first quarter after years of flat to negative growth could also come under pressure.

Analysts warned on Tuesday that operational disruption at the 175-year-old department store was expected as the board searched for a new CEO to replace the outgoing boss Paul Zahra, which could take more than six months.

Several elements of Mr Zahra's landmark strategic restructure of the business, begun in March 2012, could also be challenged or changed, including a move to small-format stores, the group's online strategy and a shift to a greater proportion of private-label clothing and fashion products in the store.

However, and importantly for investors, retail insiders believe there is nothing more sinister to Monday's shock announcement that after only 3½ years in the role Mr Zahra had announced his intention to resign and will leave David Jones when a replacement is found.

Shares in David Jones fell by 2 per cent when the market opened on Tuesday (news of Mr Zahra's planned departure was made after the market closed on Monday) and closed 6¢ weaker at $2.79.

JP Morgan analyst Shaun Cousins said Mr Zahra's departure would distract the business.

"CEO succession is likely to take time, with disruption expected," he said. "The extensive national and international search could take at least six months if not longer, in our view.

"Furthermore, it will occur as Myer is looking to replace CEO Bernie Brookes, who is retiring in August 2014, providing even greater competition for retail talent."

The former boss of fashion apparel business Oroton, Sally Macdonald, is considered a front-runner for the top job at David Jones, as well a number of senior DJs executives including the manager of merchandise Donna Player.

"The period of CEO succession uncertainty is expected to result in disruption to operational performance," Mr Cousins said.

"There is likely to be distraction from David Jones' executives until a successor is appointed, with questions regarding potential changes to organisational structure and strategy likely to persist.

"As a result, we remain concerned that like-for-like sales growth, despite having started a little better in the first quarter of 2014, could remain subdued for the remainder of fiscal 2014."

Michael Simotas of Deutsche Bank said the fact that Mr Zahra would remain in his role until his successor was appointed provided evidence that this development was his own decision.

"While this suggests there is nothing more sinister behind [the resignation], [it] does not signal that the group's performance is about to improve," he said. "The transition arrangements will lessen the disruption during the CEO search but this news will cause some distraction and it could not come at a worse time - only weeks away from the start of the key Christmas trading period.

"In recent times we believe David Jones has demonstrated some progress in its efforts to address the structural challenges facing the business. However, sales have continued to decline and industry feedback suggests that David Jones' execution is inferior to that of Myer. In our view, this is unlikely to change without a permanent CEO."

Grant Saligari of Credit Suisse said the surprise resignation increased operational risk through the second-quarter trading, raised the potential for a reversal of some of the current strategies at a cost, and increased the potential for further personnel change under the new leadership.

"David Jones generates approximately 45 per cent of annual profit in its second quarter. The sudden resignation of the CEO increases operational risk through this period."

Mr Cousins said Mr Zahra being awarded 88 per cent of his short-term incentive payment in fiscal 2013 indicated the board was comfortable with his performance.

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