Zahra spot on with focus on margins

Investors should not have been surprised by David Jones' 2.2 per cent fall in third-quarter sales given that chief executive Paul Zahra had made it abundantly clear that he was chasing profit ahead of sales.

Investors should not have been surprised by David Jones' 2.2 per cent fall in third-quarter sales given that chief executive Paul Zahra had made it abundantly clear that he was chasing profit ahead of sales.

And if one reads between the lines, Zahra is suggesting that the profit in the current half won't be down anything like the sales - indeed it should increase.

Zahra said he could have stage-managed a sales increase by discounting, but he reckons that game is over for David Jones.

It's understandable that investors are concerned that David Jones can't achieve sales and profit growth at the same time, and Zahra needs to spend more time explaining how the company is working to increase growth. But it's a tough juggling act. All retailers are guilty of feeding consumers' addiction to discounting to chase sales. It started with the global financial crisis and was exacerbated by online competition.

To place customers in rehab and wean them off bargain buying is a tall order and one that requires a measure of collusive strategy among all the retailers.

Myer has come to the party to some extent, but has not asked its customers to go cold turkey.

While the industry in general has said it wants to ease up on discounting, it only takes one big player with an excess-inventory problem to push the others into price matching. Last weekend Myer held its super Saturday sale and DJs was forced to dive into the discount swim.

While not a direct competitor with David Jones, Target has its own excess-inventory problems that have been contagious throughout the industry - particularly those operating at the discount end of the spectrum. Thus each retailer is in part beholden to their competitors' inventory management.

The drive to improve pricing power is behind the renewed war between David Jones and Myer to sign up exclusive brands.

"Our view is that the ongoing increase in the depth and breadth of discounting that we are seeing is unsustainable," Zahra says, and plenty of brands are keen to sign department store exclusives to avoid getting caught in the discounting trap.

On top of pricing issues there is the general overlay of purchasing inertia born of a lack of consumer confidence. Until a few months ago confidence had been rising but last month it fell off a cliff.

Better confidence was a big factor in the market, pushing up retail shares over the past nine months. There is now enough evidence to show that the market got ahead of itself and retail share prices will continue to ease back until signs re-emerge that customers are coming back.

Until recently the view in the retail industry was that the Reserve Bank cutting interest rates would be the trigger to entice customers to open their wallets.

But the recent rate cut appeared to have the opposite effect - it was seen as a sign the economy was more sluggish and in need of additional monetary stimulus.

The fall in the value of the dollar has only further damaged confidence, but it should work in favour of DJs, which buys in goods in local currency and competes with US online importers.

Zahra says the election might be the trigger to restore confidence. That could prove to be optimistic.

Prime minister-in-waiting Tony Abbott will be confronted with the same economic concerns that Julia Gillard has - a slow-growth economy and a growing deficit.

Consumers didn't appreciate the cuts Treasurer Wayne Swan announced in the budget but shadow treasurer Joe Hockey is not suggesting any profligacy if the Coalition wins power.

Zahra would be better devoting his energy to things he can control. The move to attract Chinese tourists to stores by introducing its UnionPay card is a step in the right direction. Investors might ultimately be better served by Zahra's strategies of managing gross margins in a weak consumer environment and waiting for the economy and consumer sentiment to turn.

The least controllable of the factors that play into discretionary spending is the weather and this season's apparel sales have been softer because winter has been later. It is only in the past week that colder temperatures have emerged.

The best-performing category for David Jones in the three months to April was bikinis rather than jumpers.

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