THE DISTILLERY: Dawdling DJs
David Jones shares managed a 4 per cent gain in a down market as investors responded positively to the company’s results that were lower, but not as much as expected. Australia’s business commentators pore over those numbers to examine just how much progress David Jones boss Paul Zahra has made modernising the company’s strategy and just what shape that strategy takes.
Also in this morning’s double shot from The Distillery, two of Australia’s premier business commentators explain just how significant the latest report on iron ore markets from Goldman Sachs is four our big miners and broader economy.
But first, The Australian’s John Durie notes that when there’s no full-year guidance the market automatically corrects to the degree to which it was wrong on the latest set of numbers.
“Beauty is in the eye of the beholder and Zahra should take every bit if luck he gets because, as he made clear, it’s pretty tough going, even if stock prices – one of his traditional spending triggers – are rising. The fact is, people would still rather save than spend. For the past seven quarters, Myer has outperformed David Jones on sales growth. But Zahra argues he is trying to boost profitable growth, which is why his gross profit margins growth did outpace his rival. But on this score, in part because 20 per cent of its sales are private label, Myer at 49 per cent gross profit margins is well in front.”
While David Jones booked a 13.5 per cent fall in first-half profit, Fairfax’s Elizabeth Knight says some are expecting the department store to reclaim that lost ground in the second half for a flat year. Although the columnist adds that Zahra wasn’t buying into that – surely to not raise expectations.
“Most of the easy cost-cutting (or the picking of low-hanging fruit) has already been done. If he gets senior management to successfully execute the ‘Future Strategic Direction' blueprint, one of the company’s big costs is a provision to reward them with short- and long-term incentives of up to $10 million. David Jones almost needed the shock of the devastating external retail environment to force it into some of the biggest and most expensive changes the department store has undertaken. It is now having to pay up to reinvent itself as a new-age retailer.”
Business Spectator’s Stephen Bartholomeusz notes the similarities between David Jones and rival Myer as they both try to bring old department store business models into the new world of thrifty customers with increasing online nous.
“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…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.”
But The Australian’s Richard Gluyas appears to disagree with the notion that David Jones and Myer are really in lockstep with each other on strategy.
“The duopoly department store sector is starting to resemble the cut-throat battle in grocery retailing, with contrasting strategies employed by David Jones and Myer to achieve their turnaround missions. Like Ian McLeod at Coles, David Jones chief executive Paul Zahra left no one in any doubt yesterday that his priority is profitable growth, built on expansion in the high-end retailer’s gross profit margin. In doing so, Zahra chipped away at his Myer counterpart Bernie Brookes, who, in much the same way as Woolworths boss Grant O’Brien, is striving to achieve the attractive fixed cost leverage that comes from consistent sales growth.”
Outside the David Jones numbers, there was a big story from investment bank Goldman Sachs that has major implications for the big Australian miners and the Australian economy generally.
Business Spectator’s Stephen Bartholomeusz explains how a report from Goldman is challenging the conventional wisdom that inefficient iron ore producers in China effectively put a price floor of $US120 on the commodity, because they simply pull back operations when they become uneconomic.
“On the demand side it believes the growth in demand for iron ore will be below GDP growth as China’s economy matures and that the global seaborne iron ore demand will eventually revert to its historic growth rate of about 2 per cent a year – a long, long way short of recent experience. That’s partly a function of the change in the composition of China’s growth away from infrastructure spending that is occurring but also because Goldman believes that some primary steel production will be displaced by steel scrap, another manifestation of a maturing of China’s economy. It also believes China’s domestic producers will prove more resilient than previously thought, with investment occurring in larger and more efficient mines which will displace the marginal low-grade producers that now account for about a quarter of China’s production.”
Consistently producing iron ore domestically at a loss? Who in their right mind would do such a thing? Fairfax’s Malcolm Maiden points out that the Chinese already have.
“Goldman believes…that Chinese iron producers will stay in business as part of China’s broader socio-economic planning, which also considers regional employment, for example. This is a judgment call by the investment bank, but there is a precedent. China’s relatively expensive aluminium industry was also expected to be priced out of existence if the aluminium price fell, and Rio’s $US38 billion purchase of Alcan in 2007 was partly predicated on that assumption. The aluminium price did fall, but the Chinese smelters secured new power supply deals, and stayed open.”
If you read Bartholomeusz and Maiden on this subject, you’ll be an authority on it.
Elsewhere in commodities, The Australian Financial Review’s Matthew Stevens says the closure of Xstrata’s Brisbane office is yet another signal that the pressures on the Australian coal industry are growing to levels that few would like to admit. The Australian’s Robin Bromby says palladium and tungsten have been taken by the Eurozone debt crisis.
Meanwhile, Fairfax’s Ross Gittins has a typically fascinating discussion of the study of racism through the prism of economics. That’s right – quantifying racism.
The Australian’s economics editor David Uren says superannuation savings for the wealthy are still vulnerable to an attack from the federal government, adding that Australian National University’s Peter Whiteford believes Australia’s ‘Robin Hood’ approach is more extreme than any other country.
In company news, The Herald Sun’s Terry McCrann has a big crack at ConnectEast boss Dennis Cliche for his idea of privatising Melbourne’s Eastern Freeway in order to help pay for the cross-city tunnel.
The Australian’s Glenda Korporaal is depressed by the contrast between the enthusiasm with which General Electric chief executive Jeff Immelt spoke about Australia (at an event conducted by her newspaper) and the scene in Canberra where a desperate government is trying to hold on to power.
The Australian Financial Review’s Chanticleer columnist Tony Boyd notices that the “oldest and most valuable” cross-shareholding relationship between Brickworks and Washington H Soul Pattinson will remain in place, despite the objections of Perpetual’s Matt Williams and activist shareholder Mark Carnegie.
Fairfax’s Michael West chronicles the downfall of mystery property developer Peter Drake and his $3 billion fund. It’s probably a moment of satisfaction for West, who is defending a report with his publisher in about Drake from May in a defamation suit.
Elsewhere, Fairfax’s Glenda Kwek reports on the record numbers of corporate collapsed in January, revealed by a private analysis of figures from the Australia Securities and Investments Commission, brought about by a strong Australian dollar, poor lending sentiment and industry volatility.
Fairfax’s Michael Pascoe delivers this oddly amusing piece about the way in which dodgy erectile dysfunction medication has undermined a terrific business model.
“Not since the British pushed opium on to the Chinese and Big Tobacco targeted kiddies for addiction has there been a business model as good as the sexual dysfunction potion.”
And finally, The Australian’s Asia Pacific editor Rowan Callick says the downfall of the Sun King, Australian billionaire Shi Zhengrong, sends a strong warning to like-minded entrepreneurs about the pitfalls of establishing a private business in China.