The Distillery: DJs blame game

Jotters apportion responsibility for David Jones' troubles, while one wrangles with Telstra’s fixed-line pain.

David Jones boss Paul Zahra took over from predecessor Mark McInnes, who was lauded at the time, in controversial circumstances. Three years later Zahra is still having a hard time with the legacy of McInnes, but it’s got nothing to do with the departure.

Also in this morning’s edition of The Distillery, Telstra’s sackings are less about getting costs down and more about making sure it’s expenditure is going towards businesses that are growing and will continue to grow.

The Australian’s Blair Speedy says the cautious approach from Zahra is no doubt influenced strongly by the terrible downgrade he was forced to deliver in July 2011, just a year into the gig.

“Hence his decision to cut inventories by almost 10 per cent, or about $28 million, when sales for the past financial year are down by 1.2 per cent, or $22.8 million. Aged inventory – essentially last season's fashions – is down to 5 per cent of overall stock. It's this sort of inventory control that has allowed Zahra to reduce the level of discounts DJs offers – by cutting both the size of reductions and the length of sale periods – and thereby rebuild gross profit margins, which increased by 80 basis points to 38.3 per cent over the course of the financial year.”

Fairfax’s Michael Pascoe writes that while McInnes is explicitly blaming the Labor government for his troubles at Solomon Lew’s Premier Investments, Zahra is quietly blaming McInnes for some DJs troubles.

“The man who replaced McInnes as DJs chief executive, Paul Zahra, doesn't actually name him and the dud DJs board in Wednesday's annual results and strategic plan update but it's there between the lines as the chain struggles towards becoming a 21st-century business. A new point-of-sale system running on electricity has replaced the previous steam-powered model, making all sorts of modern retail systems possible. There's the whole omni-channel thingy, and the idea of providing service in the shops is catching on.”

Business Spectator’s Stephen Bartholomeusz notes that DJs can at least stand by the fact that it held ground in its latest year, with after-tax earnings up 0.5 per cent to $101.6 million.

“Zahra and the market know, of course, that the group’s earnings base is about to be challenged again when its financial services alliance with American Express, which has had underwritten profitability, converts to a share of actual underlying profits. That alliance generated $49.5 million of EBIT for David Jones in the year just ended but will roughly halve this financial year. David Jones’ strategy under Zahra has been to try to control those things while repositioning the business for the new retail landscape. On that basis, Zahra did a pretty decent job last year. The group’s cost of doing business edged up by $11.8 million because of greater investment in customer service plus increased employee costs but an 80 basis point improvement in its gross profit margin helped blunt the impact. The department store EBIT fell only 5.5 per cent to $99.5 million despite a 1.8 per cent decline in comparable stores sales.”

In other corporate news, The Australian Financial Review’s Chanticleer columnist, Tony Boyd, writes that Telstra’s job cuts come on the back of an obvious decline in the telco’s core businesses and the need to shift to the new paradigm.

“The copper lines that Communications Minister Malcolm Turnbull now covets for his fibre-to-the-node broadband plan are not enjoying a renaissance. It will be a handy negotiating tool for ­Telstra as it works to ensure Turnbull meets his promise to keep $11.2 billion in NBN Co payments intact. But that transaction will not stop the change in customer behaviour as Australians keep switching off fixed-line phone connections in favour of mobiles or Skype.”

Fairfax’s Malcolm Maiden is similarly aware that Telstra’s decision stems from the fact that the telco needs to use some of those NBN dollars to shape its post-copper future.

“The aim is not to shrink the company to greatness – that never works – but to control costs by redirecting spending to the growth areas rather than expanding the existing budget to resource them. The strategy does however create a vice for jobs in the traditional Australian-based businesses, and it is being turned tighter as Telstra also sends administrative work offshore to lock in lower labour costs.”

Elsewhere, The Herald Sun’s long-time interest rate watcher Terry McCrann gives his reasons for why the Reserve Bank won’t cut interest rates next month.

And The Australian’s John Durie looks at the numbers breakdown of Australia’s top boardrooms and finds that there is some new blood that’s getting into director chairs. But it’s still slow going, with old blood continuing to receive preference.