More pain for David Jones shareholders

David Jones Limited (ASX: DJS) has this morning announced a significant fall in forecast second half profit, coming hot on the heels of a big first half drop.

As we reported, David Jones shares were put into a trading halt on Monday after an Australian Financial Review report that the company’s credit card business would see a significant drop in profit at the end of its current deal with American Express (NYSE: AXP).

Confirming market fears, David Jones has announced an expected 35 – 40% drop in second half profit, after a first half profit that was 19.6% below the prior year. The H1 profit drop was in line – just – with management guidance of 15 – 20% down.

The results are also sobering news for other listed discretionary retailers such as Harvey Norman Holdings Limited (ASX: HVN), Myer Holdings Limited (ASX: MYR) and comes hot on the heels of a disappointing result from Kathmandu Holdings Limited (ASX: KMD).

First half sales were down a touch over 6.5%, and the company is still reporting significant headwinds from structural changes to the retail landscape (read: the impact of the internet), subdued consumers spending and a more conservative consumer approach to credit.

Confirmation bias – or the tendency to notice or give more weight to facts/opinions that agree with your own – is one of the hardest biases to overcome.

If you’re already bearish on retail, this latest news is likely to confirm your view. If you’re contrarian, the steps the company’s board and management are taking will likely give you confidence that better times are to come.

I tend to be in the latter group on David Jones (and I own shares in the company), but this latest announcement certainly has enough for both points of view.

The company is forecasting a two-year wait for profit growth – with the 2014 financial year being the first year of lower profits from their credit card business, offset by the company’s forecast recovery in its core retailing business.

As The Motley Fool’s general manager Bruce Jackson told me this morning “it’s a long time for shareholders to wait… and lots of execution risk”.

He’s hit the nail on the head.

DJs looks to be making all of the right moves. The company is negotiating harder with suppliers to ensure it gets the best global prices, is investing in store staff and working hard to become an ‘omni channel retailer’ – industry speak for what’s colloquially known as ‘bricks and clicks’ with both a strong traditional retailing offer complemented by an online presence that the company thinks could eventually represent 10% of sales.

David Jones shares are down 8.5% this morning to $2.50 in early trade, up from lows of $2.38.

The key question confronting shareholders is whether they are prepared to wait for the strategy to bear fruit, and the amount of rope they’ll give the company – two years is a long time to wait, and a lot can go wrong (and a lot can change in the retail industry) in the meantime.

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Scott Phillips  is a Motley Fool investment analyst . Scott owns shares in David Jones and Harvey Norman. You can follow him on Twitter @TMFGilla.  The Motley Fool’s purpose is to educate, amuse and enrich investors.  This article contains general investment advice only (under AFSL 400691)

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