Zahra knows the tricks, now it's time for execution
By any measure, the 13.5 per cent fall in profit the department store retailer announced was not good - it's just that it was expected to be worse.
Some are even suggesting the company might make up the first-half profit fall in the second half and produce a flat result for the year. This was something the David Jones boss wasn't prepared to speculate on.
Paul Zahra knows the next reporting period will be tough. The company is deliberately sacrificing profit to invest in future improvements. This strategy has its risks - the obvious one being that the gains won't eventuate. But DJs does not really have a choice.
Zahra has to spend money to save money. Most of the easy cost cutting (or the picking of low hanging fruit) has already been done.
If he gets the 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. Thanks to the performance over the past couple of years, there have been no significant incentive bonuses made.
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.
The company is now having to pay up to reinvest itself as a new age retailer.
This is not just about having a fully functional and appealing website. That is part of it. It also needs to strike new deals with suppliers in order to bring the cost of products in line with online prices. This involves omni-channel and cost-price harmonisation. Half of David Jones' suppliers are now on board with harmonisation and the rest will be dealt with over the coming year. These are the two "musts" without which any discretionary retail business will be in long-term decline.
The other trick - which thankfully Zahra is working on - is to make the bricks-and-mortar shopping experience a treat rather than an exercise in frustration. An appealing in-store experience includes plenty of staff, cash registers that are not older than their customers and IT systems that allow plenty of customer data mining. The introduction of style advisers is long overdue, as has been the beefing up of general service levels - but they come at a cost.
It's a big job, and will ultimately require the refurbishment of the entire store fleet over time.
Zahra suggested the new age DJs may require fewer stores. Over the next five years, six store leases expire, giving David Jones "the opportunity to review its store portfolio in the light of its broader omni-channel retailing strategy".
Myer is also cutting down its retail space in response to the internet market, but says the number of stores will remain the same. However, things can change.
Both the department stores are working on churning some of their product categories - getting out of some and beefing up others. David Jones is now focused on allocating 75 per cent of its floor space to the higher-margin fashion and beauty business, and is shrinking homewares to 25 per cent.
The two positive aspects are that sales are only slightly down and - thanks to better deals with suppliers and less discounting to customers - the gross profit margin is much better (this is the difference between what a retailer pays for its goods and the price it sells them at to customers.)
Zahra's next objective is to grab a bigger slice of the home-brand market - developing products in some non-designer apparel and homewares. The profit margin on home-branded goods is about 60 per cent. Given David Jones markets itself as a "house of brands", Zahra does not want to dwell too much on the home-brand strategy. Regardless of the success, he doesn't want these products to make up any more than 10 per cent of sales.
Frequently Asked Questions about this Article…
David Jones reported a 13.5% fall in half-year profit, but the result was better than many had expected. Because the outcome wasn't as bad as feared, retail analysts upgraded their full-year earnings estimates for the company.
Some analysts suggest David Jones might make up the first‑half profit shortfall in the second half and produce a flat result for the year, although CEO Paul Zahra declined to speculate. The possibility depends on execution of the company's turnaround plans.
Zahra is deliberately sacrificing near‑term profit to invest in improvements — spending now to 'save' later. That includes store refurbishments, better IT, more staff and customer service, omni‑channel upgrades and supplier deal changes. Those investments increase costs in the short term and carry the risk that the expected gains may not materialise.
David Jones is working on omni‑channel initiatives such as a fully functional website, cost‑price harmonisation with suppliers so in‑store prices align with online prices, and richer customer data systems. About half of its suppliers are already on board with harmonisation, with the remainder planned to be addressed over the coming year.
The company is beefing up in‑store service with more staff, modern registers, IT systems for customer data mining and introducing style advisers. These changes require refurbishing the store fleet over time and raise costs upfront, which investors should monitor as part of execution risk.
Zahra has suggested the 'new age' David Jones may require fewer stores. Over the next five years six store leases expire, giving the company an opportunity to review its store portfolio in light of its omni‑channel strategy. Myer, by comparison, is reducing retail space but currently says its store count will stay the same.
David Jones plans to allocate about 75% of floor space to higher‑margin fashion and beauty and shrink homewares to roughly 25%. It is also pursuing a home‑brand strategy where home‑branded goods can deliver profit margins around 60%, though Zahra doesn’t want home‑brands to exceed about 10% of total sales.
The potential rewards include improved gross profit margins (already helped by better supplier deals and less discounting) and higher margins from home‑brands. Key risks are that the expensive investments and store refurbishments may not deliver expected gains, and the company has set aside up to $10 million in incentives to reward successful execution — a cost that depends on performance.
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