THE DISTILLERY: DJs blues

Management is all about managing, anticipating, planning, adjusting (strategy) and altering course. In retailing, isn't management about responding to and trying to lead or lure customers? So what then do we make of bleats from retailers like David Jones about how consumers have deserted them and gone all spending shy? Surely the lack of sales and customers (footfall, as it's known in the trade) would have sent alarm bells flashing and management rushing to change course? What none of the jottery has considered is whether the pain in retail is a form of restructuring, like that which the steel, car and other industries have had to undergo in the past 30 years and continue to face today. Retailing's new reality is here?
 
First up, the News Corp hacking scandal and the Financial Times reports in its Asian edition this morning: "Rupert Murdoch and his son James bowed to pressure from MPs on Thursday and agreed to give evidence next week to a House of Commons committee investigating the News of the World phone hacking scandal. The two had been summoned by the select committee to appear by the office of the Serjeant at Arms, which is responsible for keeping order within UK parliament, who sent an official to News International's east London headquarters on Thursday to deliver the summons in person. Both Rupert Murdoch and his son had earlier declined an invitation to appear before the culture, media and sport committee which has oversight of the media industry." Ancient Rome returns to London. Go the lions!
 
Back in Australia, and the malls are strange, empty places where throngs once flocked: the Financial Review said this morning: "DJs' management was doing its best yesterday to paint the problems confronting the 173-year-old retailer as an industry-wide rather than company-specific issue." The paper also reported: "Retail property giant Westfield Group's vulnerability to the woes of tenant David Jones made it a target for short sellers yesterday."
 
The Herald Sun reported this morning: "David Jones has suffered the biggest one-day share price collapse in its history after warning that customers are abandoning the group's stores amid a "perfect storm'' besetting the entire retail sector. In a sign that the crisis in consumer confidence is worse than anyone has acknowledged, chief Paul Zahra admitted the retailer – traditionally regarded as one of the best managed in Australia – had been blindsided by the depth of the downturn and left with inventory it couldn't sell. The admission came as shares across the retail sector tumbled in the wake of David Jones' startling profit warning on Wednesday night."
 
In the wake of the David Jones downgrade, Fairfax's Elizabeth Knight wrote another perceptive column today: "Anecdotal evidence suggests while there is a lot of pain in retail, David Jones is suffering a bit more than the broader market. (Having said this, the apparel retailer Noni B came out earlier in the week signalling its 2011 profit would be off a whopping 80 per cent.) Consumer confidence has been blamed for the retail malaise. Many reasons are given for buyer insecurity. Zahra maintains it is a cyclical downturn and that shoppers will eventually come back. But he has been saying this for a while. According to David Jones's economic advisers, Access Economics, retail demand was scheduled to be on the ascendancy right about now and would continue to improve over the second-half of this calendar year. This is now way off the mark."
 
Yesterday Knight wrote on smh.com.au: "One good reason that Myer is not issuing a revised profit warning today is because it has already told the market that its profit would be 5 per cent lower this year. Until last night David Jones had stuck with the guidance that its profit would be up this year. But the new reality is neither company can hold onto last year's financial performance level – not because last year was a bumper season but because this year is a disaster."
 
The Australian's Nabila Ahmed said the DJ's boss has a big meeting this morning: "Paul Zahra wanted to wait until the last possible minute to see if sales at David Jones, which had plunged in June, would recover during the department store's clearout clearance – discounted discounts – sale in July. After all, that's what happened in 2008, when the retailer recovered from a poor June through the strength of the extra discounts in the first half of July. But when Zahra sat down with the numbers on Wednesday, it was clear this time was going to be different. Zahra, who this morning meets investors to talk about the company's first profit downgrade since 2009, is thought to be reviewing David Jones's forecasting procedures. The department store has long relied on Access Economics data but now plans to be much more conservative, after the forecasters apparently miscalculated even the shape of the graph in relation to consumer sentiment in June and July."

The AFR also reported: "A major Melbourne CBD shopping centre, containing more than 100 stores, is in the hands of receivers as the sector suffers from weak consumer spending."   
 
Meanwhile, Tim Boreham had a sensible commentary on David Jones this morning in The Australian: "If shoppers have merely shut their purses temporarily, the marked-down shares look a bargain. But there's growing concern the online shopping boom has opened consumers' eyes to superior range and value elsewhere. Tightwad shoppers threaten DJs' reputation as a top investment in a way that last year's sexual harassment blow-up never could. Reflecting the hardening attitude, Deutsche Bank's analysts yesterday changed their buy rating on DJs to hold: "While the company has a solid record of delivering robust bottom-line performance through very difficult conditions, we suspect management is running out of cost levers to pull. We thought DJ's blue-rinse franchise was immune to everyday worries such as petrol prices and interest rates. Consumer sentiment studies show the well-paid are the most gloomy, so the mid-market Myer could do better than DJs. But with DJs moving into Kath and Kim areas (such as Highpoint in Melbourne's west), the distinctions become blurred."
 
And Boreham wrote on The Australian's website yesterday: "In a twist on DJ's snobbish mantra that "there is no other store like David Jones", Myer today moved to distance itself from its sullied upmarket rival by affirming guidance for a 5 per cent decline in earnings for 2010-11. After tossing and turning all night, investors this morning sent DJs shares down 60 cents (15 per cent) to two-year lows, while Myer (MYR, $2.53) shares fell 4.5 per cent to a new record low despite management's protestations its result would be within 5 per cent of the $169 million in 2009-10. The issue du jour is how much DJs underperformance reflects the wider industry and how much is due to unique factors."
 
The AFR said: 'The market has taken the knife to half-year earnings forecasts for Rio Tinto after the miner reported relatively weak first-half production figures."
 
Malcolm Maiden wrote in the Fairfax broadsheets today: "The ''perfect storm'' of negative sentiment and uncertainty that the chief executive of David Jones, Paul Zahra, referred to yesterday is a market-wide influence. Peabody Energy's $4.7 billion takeover offer for Macarthur Coal last Monday, for example, signalled the US group's confidence that steel-making coal has a promising long-term future, even if governments impose price penalties on coal production and consumption. But Peabody was also capitalising on the fact that shares in Australia's coal miners had been beaten down by uncertainty, including that surrounding the negotiation of the carbon tax announced last Sunday."
 
The Financial Review reported on its website this morning: "Federal Reserve chairman Ben Bernanke warned Congress on Thursday that overzealous cuts to government spending in the short term could derail an already fragile recovery." That helped send markets lower after they mistakenly believed the Fed would bail them out with more easy money.
 
Bank shares used to be solid, but lately they have been weak, retracing to 2008 levels in some cases. Fairfax Insider Ian McIlwraith points out this has an advantage: "If you are working on a yield argument as an investor – dividends as a percentage of the cost of the shares – Westpac is now sitting at above 10 per cent. Of the other members of the big four, National Australia Bank and ANZ are above 9 per cent and Commonwealth Bank comes in at about 8.8 per cent. You cannot get these returns on your money if you park it with them in term deposits, even if you are prepared to leave it there for five years – about 6.6 per cent is the best rate going around. So the income on bank stocks at the moment looks attractive. The growing problem is that the market frame of mind is so skittish, there are no guarantees you can liquidate an investment in bank shares at a profitable price – something unheard of before the slow-motion financial collapse."
 
AAP reported: "Shares in newspaper publisher Fairfax Media have fallen to a two-year low, cementing its position as the ASX 100's worst performer. The fall follows investor concerns about the threat of more media regulation and lost advertising dollars from struggling retailers. Fairfax lost as much as 10 per cent to 85.5 cents on Thursday, before closing down four cents, or 4.21 per cent, at 91 cents, a 27-month low."
 
The Financial Review reported this morning: "Some of last year's worst-performing fund managers are among this year's best stock pickers, beating the benchmark with returns as high as 26 per cent as volatile sharemarkets upset last year's stars."
 
And finally for the week, The Australian's Bryan Frith has found a situation worthy of ASIC probing: "If the corporate regulator ASIC is serious about its claim that under new chairman Greg Medcraft it plans to take a tougher approach to regulation of takeovers, including issues of illegal association, it should take a hard look at the Takeovers Review Panel's findings on the investment company Bentley Capital. Bentley chairman Farooq Khan admits to a 28.3 per cent shareholding through his Queste Communications and the listed Orion Equities. His sister, Ambreen Chaudhri, and her husband, Azhar, who reside in Rawalpindi, Pakistan, acquired 10.45 per cent of Bentley two years ago through Database Systems (DBS), a company they control, and DBS recently acquired a further 8 per cent at 22 cents a share."