David Jones investors might be getting cheques for a dividend of as little as 6? a share for the second half of this financial year after the company warned of a 35 to 40 per cent profit drop.
That is the minimum amount of money that DJs' board could elect to pay as a final dividend in August, based on its stated policy of "no less than 85 per cent" of after-tax profit paid to shareholders.
Insider suspects that the DJs board will, though, opt for a higher payout ratio - although basic maths based on the forecast suggest that earnings per share will struggle to top 21? in the full year, which means an absolute best payout of 10.5? in the second half unless DJs' board elects to eat into retained earnings.
Let us face it, though this year's result was always going to be miserable because of retail conditions. The upmarket retailer's chief, Paul Zahra, has clearly decided that he might as well take as many hits on the chin into this year's results to offset what he already knows will be struggle years in 2013 and 2014.
DJs, like all retailers, hopes that consumers will recover their love of shopping soon, but that is far from a sure bet. So it is forecasting what it calls "moderate growth" next financial year - anywhere from zero to 5 per cent would be Insider's guess and wants to bring forward as many nasties to this year's results so it can fulfil that estimate.
About the last thing that DJs, or Zahra, need now is to fail to deliver. In 2014, its co-branded credit card venture with American Express becomes a half-share of profits, rather than what have in essence been instalment payments on the 2008 sale of its store card receivables to Amex.
DJs still may have to answer to the corporate watchdog on the question of when it knew that it was going to have to find another $25 million a year of earnings before interest and tax just to tread water because of the Amex deal.
If it delayed confirming six months' of speculation to that effect, by analysts and media, until it had strategies to offset the earnings fall, Insider would consider that a sub-optimal choice in an environment where the Australian Securities and Investments Commission is clearly drawing a line in the sand on the vexed subject of continuous disclosure.
Either way, DJs' earnings in the second half of this financial year, on Insider's extrapolation of the company's guidance, are likely to be a miserable $15 million to $25 million. In the same six months of last year it made $62.4 million. That fall will reflect the cost of clearing excess stocks and administrative staff.
For all the 2010-11 financial year, the upmarket retailer made $105.7 million in the first six months. This year it will struggle to earn that in a full year.
Zahra yesterday spent at best the first five minutes of a 90-minute media presentation and question session on 2012 results. The rest was devoted to pitching his three-year strategy, approved by the board on Tuesday, to rapidly shift where and how DJs presents itself to its target market of affluent customers.
Omni-channel retailing and seamless experiences are now omnipresent buzz phrases for retailers describing their future - which is not in any way to dismiss the commonsense of making your wares available in as many practicable formats as possible to maximise the chance of a sale.
To at least survive, and preferably prosper, DJs and Zahra have little choice but to follow their customers onto the internet, and offer them the convenience of stripped-down, smaller format stores located close to the homes of cash-rich, time-poor customers.
"Our customers have more information at their fingertips than our staff do," observed Zahra, who is trying to re-equip, re-train and re-inspire (with extra commissions) his "customer-facing" staff as quickly as sensible.
He also has a cunning, but covert, plan to create 200 "new, innovative frontline service roles" aimed at "differentiated and specialised services" which he politely declined to detail for competitive reasons. Insider would guess at more personalised shopping and guidance, such as mimicking online shopping by immediately ordering and organising delivery of items not actually in stock when a customer wants them.
CAN DO TYPE
Nine years on from having his first privatisation of National Can Industries shot down by Raphael Geminder and other parts of the Pratt family empire, Michael Tyrrell has mounted a brave and generous $123 million offer for the company.
In 2003 Geminder bought a blocking stake and stymied the offer. This time Tyrrell got Geminder to sign a binding agreement on Tuesday to sell his 19.99 per cent stake before the scheme was launched yesterday.
All shareholders in National Can are being offered an exit at $1.84 a share - a level not seen for about four years and enough to winkle out Geminder, who bought his initial stake when Tyrrell was only bidding $1.55 a share. Turnover in the shares yesterday soared as investors rushed for exits, happy to take more than $1.70 a share now.
KPMG still has to prepare an independent report, and shareholders will vote in May on the scheme - which also needs the corporate watchdog's approval because National Can's balance sheet is helping to finance the privatisation.
The offer is equivalent to 23 times earnings, an extraordinary multiple for a business that (with due respect to the founding Tyrrell family) bangs out bulk paint tins and plastic food pails in a highly competitive market - that just happens to include Geminder's Pact Group.
Not only that, the deal will involve putting debt on the National Can balance sheet, and spending its cash reserves, in a time when manufacturing in Australia is seen as a growing graveyard, thanks to offshore competition, a shallow domestic market and an unhelpfully high local dollar.
Pact's stake in National Can was cited as one of the issues that the Australian Competition and Consumer Commission was weighing in Geminder's bid to acquire the $200 million a year in sales Viscount Plastics.
That has been stalled since late last year. Maybe getting out of National Can will not only deliver Geminder a profit on the shares, but makes his passage through the commission a little easier.
insider@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What dividend might David Jones shareholders expect after the company warned of a 35–40% profit drop?
According to the article, David Jones’ board policy is to pay no less than 85% of after‑tax profit, which means the final dividend in August could be very small—the article cites a possible minimum of about 6 cents a share. Insiders think the board may opt for a higher payout ratio, but weakened earnings this year mean second‑half dividends look likely to be modest unless the board taps retained earnings.
Why has David Jones warned of a 35–40% fall in profit and how will that hit earnings per share?
The profit warning reflects tough retail conditions, the cost of clearing excess stock and higher administrative staffing costs. The article estimates second‑half earnings could be a miserable $15–25 million (versus $62.4 million in the same six months last year). It also notes earnings per share are likely to struggle and may not top the low levels forecast for the full year, constraining dividend capacity.
How does the American Express co‑branded card change affect David Jones' profitability?
The article explains that from 2014 the co‑branded card venture with American Express becomes a half‑share of profits rather than the instalment‑style payments David Jones had received previously. That change effectively means DJs may need to find about $25 million a year of earnings before interest and tax to replace the lost contribution from the Amex arrangement.
What strategic steps is CEO Paul Zahra taking to help David Jones recover?
Paul Zahra presented a three‑year plan focused on omni‑channel retailing: pushing the business online, offering seamless shopping across formats, opening smaller stores closer to affluent customers, re‑equipping and re‑training customer‑facing staff (with extra commissions), and creating about 200 new frontline roles aimed at more personalised and specialised customer service.
What are the main risks everyday investors should be aware of with David Jones right now?
Key risks cited in the article include continued weak consumer spending, the large fall in earnings this year, the impact of the Amex profit‑sharing change, execution risk on the new omni‑channel strategy, and potential scrutiny from the corporate watchdog over disclosure timing. Any of these factors could pressure the share price or future dividends.
How will David Jones' move to omni‑channel retailing and smaller‑format stores impact customers and sales?
The article says omni‑channel retailing aims to make products available in as many practical formats as possible—online and in smaller local stores—to maximise sales opportunities. For customers, that should mean greater convenience, more seamless buying experiences, faster ordering of out‑of‑stock items and services closer to home for time‑poor, cash‑rich shoppers.
What near‑term events should investors watch for to assess David Jones' recovery progress?
Investors should watch the August dividend decision, the company’s second‑half earnings result and guidance, updates on how management will replace the Amex revenue impact, progress on implementing the three‑year omni‑channel plan (including store formats and frontline roles), and any developments in regulatory scrutiny or disclosure issues.
What happened with the National Can takeover offer mentioned in the article and what does it mean for shareholders?
The article describes a $123 million scheme offer from Michael Tyrrell to buy National Can at $1.84 a share. Raphael Geminder agreed to sell his 19.99% stake before the scheme launched, which helped the bid proceed. KPMG must prepare an independent report and shareholders will vote in May; the deal would be about 23 times earnings and involve adding debt and using cash reserves, raising questions about long‑term strategy and regulatory approval (including ACCC considerations).
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