David Jones and Myer slug it out

What does a takeover offer for Saks mean for Aussie department stores?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Saks (famous for its iconic Fifth Avenue store in New York) has received a takeover offer from the Canadian department store group Hudson's Bay. Saks got into trouble from ill-advised expansion leading to a number of poorly performing stores, and the offer values Saks at a massive 38 times expected 2014 earnings. Evidently, North American trade buyers don't see department stores as dinosaurs (unless poorly managed) – instead they are seen as potentially robust retail franchises.

Does the Saks takeover have any relevance for Aussie department stores? First, there is no suggestion they deserve a PE of 38, however there are some interesting parallels.

Myer (ASX: MYR) trades at 11 times earnings and David Jones (ASX: DJS) at 15 times. Both have high dividend yields – Myer, 10.3% grossed up, and David Jones, 9% grossed up. By global standards both domestic department store groups appear undervalued.

However, price earnings ratios and yields don't necessarily reveal the intrinsic value of a company. Underlying assets and possessing the financial capacity to invest in business growth are frequently more significant criteria when assessing a company's future, especially in challenging times.

For example, a major attraction of Saks is its real estate portfolio (comprising fully owned stores), valued at $1.5 billion (or 47% of capitalisation). By comparison, David Jones' property assets are valued at $600 million (or 41% of capitalisation). Myer has no property assets.

When it comes to the balance sheet, Saks has a debt to equity ratio of 27%, Myer is equivalent with 27%, and David Jones is a restrained 8%. On gross profit ratios Myer leads the way with 41%, Saks is next with 40% and David Jones comes in third at 39%.

Myer's present operational advantage was achieved in a period of private equity ownership – away from Mr Market's impatient eyes. The owners invested heavily in upgrading administrative, marketing and technology systems, developing store labels and improving premises. During the same period, David Jones did a little cost cutting and had limited initiative.

However, since 2012 David Jones has itself been putting levers in place for much improved operating performance. Results should be apparent over the next two years.

Foolish takeaway

On basic ratios, Myer appears a better buy – however, it has mildly negative net tangible assets (-5c per share), $1.60 of intangibles per share and 72c of borrowings per share. These factors will limit the financial scope should further retail challenges lie ahead.

David Jones has net tangible assets of $1.46 per share, 9c per share in intangibles and 14c of borrowings per share. These metrics allow David Jones the capacity to invest in the business and meet future challenges. To this Fool, DJS is the better growth prospect.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."  

More reading


Motley Fool contributor Peter Andersen owns shares in David Jones and Myer.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »