-Focus on margin expansion
-But at the expense of sales growth?
-Broker sentiment divided on turnaround
By Eva Brocklehurst
David Jones ((DJS)) is transforming. For brokers it's not a moment too soon, as department stores have been plagued by a soft consumer environment and a need to respond to new trends in shopping. In its first half results the company has flagged progress with its strategic plan, reducing costs and expanding margins. Earnings were ahead of expectations for the half but sales growth was not. What pleased was the increased margin. What concerns brokers? A lot of things. Most importantly, a lack of sales momentum.
There's no Buy rating on the FNArena database. Two brokers have downgraded ratings to Sell in the wake of the results. There are five Sell ratings. There was one upgrade to Hold - JP Morgan, and there are three Hold ratings. The consensus target price is $2.73, suggesting 11.5% downside to the last traded share price. A dividend yield of 5.5% is reflected in consensus earnings forecasts for FY13.
David Jones is concentrating on improving quality sales. The company has decided to pursue more private label business, increasing this to 10% of sales against the current 3.5%. To reinstate the retailer's stamp on quality and higher margins, sales growth will be affected as the store exists music, DVDs and games. More store space will be allocated to fashion/beauty and home. Some home categories such as electrical are on the exit plan and stores with the wrong demographics will be closed. Macquarie has noted that the company did not specify any closures and, as all stores are profitable, doubts the retail footprint will actually be reduced. The broker suspects the planned review of expiring leases, something all retailers do at the time, is just a shot across the bows to the landlord. Macquarie flags the planned opening of seven stores over the next few years, with four of these by end FY15.
The broker finds David Jones trading at a premium to domestic peers and, given a loss of around $25 million in financial services business in FY14, the company will have to move ahead forcefully just to maintain ground. Macquarie dismisses the strategic