Why I recently bought David Jones

Is the department store format about to stage a revival?

a woman

Australia’s upmarket department store, David Jones Limited (ASX: DJS) has seen its share price fall more than 50% since 2009. Three years of falling revenues, profits and dividends and an uncertain outlook can do that.

The reasons for the falls are many.

The company has been losing sales to online stores and international retailers that have set up shop here, and David Jones’ has been slow to embrace online shopping. Weak consumer confidence and a willingness to save rather than spend have compounded those issues to hit not just David Jones, but other fashion retailers like Premier Group (ASX: PMV) and Speciality Fashion Group (ASX: SFH).

The company’s alliance with American Express changes in 2014, which will result in earnings for its financial services division halving. 75% of spending on David Jones American Express cards now occurs outside David Jones stores, and the company’s financial services division contributes around a third of total earnings.

The best time to buy is often when a sector is on the nose and shareholders are running for the exits. Many investors expect recent results to continue into the future, and can’t see a change in the company’s fortunes. Most of the time they are right, but occasionally they can get it wrong.

So, what’s to like?

The first step in fixing a problem is admitting there’s a problem in the first place. Management have admitted they’ve taken their eyes off the ball, and have put in place plans to reverse the fall in profits. As an example, no less than five initiatives are underway to increase revenue generated by the financial services business.

The company is finally revamping its online site and ramping up the number of items for sale from 9,000 to 90,000 by Christmas, as well as launching a new online shopping site in early 2013. Severe staff cuts in previous years are being reversed, as the company increases the number of customer service staff. David Jones is also opening more mini shops in parts of its stores to companies like OrotonGroup Limited (ASX: ORL).

Additionally, automation of some previously manual tasks, introduction of new exclusive brands and a host of other improvements should see the company improve its service and offerings, cut costs and bring customers back in-store.

David Jones is also rolling out smaller format stores into fashion districts in our major cities that don’t already have a shopping mall, and which by all accounts, have been very successful so far.

Risks

The company has $136 million in debt, against $730 million of tangible assets, including its four premium properties in the heart of Sydney and Melbourne, recently valued at $612 million. As such, that should limit the downside risk.

As for upside risk, David Jones still faces threats from online retailers, as well as international retailers setting up in Australia, like H&M, Top Shop and Zara. A resurgent Myer Holdings (ASX: MYR) could also be a threat, as well as the current weak retail environment.

The biggest risk though, is that despite all the company’s plans to turn the business around, it’s unable to attract enough shoppers to grow its revenues, is unable to keep down costs and materially increase its profits. Very few turnarounds turn.

However, David Jones faced similar issues in 2002/2003 and managed to turn things around, with earnings per share growing by an average 38% over the next three years. Of course, we can’t assume that history will conveniently repeat itself. I’d settle for half that growth.

The Foolish bottom line

The results the company achieves in 2013 will go a long way to indicating whether the company has managed to achieve the goals it has set for itself. David Jones has set itself a goal of increasing earnings in the 2014 financial year above 2013, despite the effect of the 50% fall in earnings from its Amex alliance in 2014. If the company can achieve that, we could see a share price far north of its current price.

If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King owns shares in David Jones. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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