3 reasons why David Jones will smash the market

Department store retailer ups pressure on suppliers and landlords

a woman

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Department store retailer David Jones Limited (ASX: DJS) is in the midst of turning around its poorly performing business.

After taking a ‘head in the sand’ approach for several years over the threat from online competition and offshore suppliers, David Jones has finally woken from its slumber and instituted a new strategy of getting the business back on track and being competitive. The company has revamped its online offering, increasing the number of items on sale from 9,000 to 90,000 by the end of last year, and taken a number of other steps to cut costs, raise revenues and improve customer service.

Here are three key reasons why it will perform strongly over the next decade.

#1 – Pressure on suppliers to cut prices

David Jones has announced that it has given international suppliers 12 months to cut prices or face being cut from shelves. Major retailers have long complained that international companies charge Australian retailers far more than they do in other countries. In a strategy known as ‘price harmonisation’, retailers like David Jones and competitor Myer Holdings (ASX: MYR) want suppliers to cut their prices and bring them into line with other countries. Woolworths Limited (ASX: WOW) has already sourced cheaper products in Asia made by European giant Unilever, including toothpaste and deodorant.

#2 – Force landlords to reduce leases

The department store retailer is also taking a close look at cutting costs. One of the major costs is the rent it is charged in shopping malls, and companies like Westfield Retail Trust (ASX: WRT) and Federation Centres (ASX: FDC) – ex-Centro Retail, face the prospect of either working with David Jones or losing one of its most prominent anchor stores. So far, the retailer has struck deals with landlords to reduce leases from 20 or 25 years down to 15 years, reducing the capital expenditure commitments.

#3 – Increased focus on loyalty cards

David Jones’s contract with American Express changes next year, which will see result in a fall in earnings, estimated to be around $25 million. In an effort to offset the fall, David Jones is rolling out a new rewards program for its store card members, offering customers frequent flyer points and gift card points when they shop at its stores or online. As other retailers have found, loyal customers can dominate sales.

Foolish takeaway

The current fall in the Australian dollar exchange rate should also help David Jones become more competitive. David Jones could also surprise the market with positive growth – analysts don’t seem to have a liking for the company, forecasting a slight fall in earnings next year. The icing on the cake for yield hunters is a 6% fully franked dividend.

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