Zahra knows the tricks, now it's time for execution

Retail financial experts spent Wednesday upgrading their full-year earnings estimates for David Jones following a better than expected half-year result.

Retail financial experts spent Wednesday upgrading their full-year earnings estimates for David Jones following a better than expected half-year result.

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.

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