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Is it time to buy David Jones?

Paul Zahra, the David Jones (ASX: DJS) CEO, has often referenced the North American Nordstrom (NYSE: JWN) as the ideal business model for the future development of David Jones. Let’s compare the two:

Nordstrom                                                       David Jones

117 full line stores                                             37 full line stores

+ 128 Rack stores*                                            + 1 ‘Village Concept’ store

+ 200 Restaurants/Coffee Bars                        +  discount outlets

*Rack stores are a standalone concept promoted as a “fun, fast and easy to shop destination where style meets savings”. They are also used to clear stock from the full line stores.

Nordstrom                                      David Jones

Reach: 1 full line store per 2.8 million people             1 full line store per .6m people

Demographic: Mid-high income                                   Mid-high income

Strengths:        Fashion, shoes                                   Cosmetics, fashion, food halls

Known for:          High service quality                           Moderate service quality        

Financial services:     Owns a bank*                           Profit sharing with Amex

Last 3 years: Strong growth in profits/sales                Weak performance in profits/sales

*Has banking licence, mainly used for proprietary credit/debit store cards.

Both Nordstrom and David Jones operate in a similar strategic space; however the local David Jones faces three major challenges.

  1. Although competitive, North American department stores are differentiated when compared to Australia. This helps in developing and retaining a distinct market focus and appeal.
  2. With one full line store per 600,000 people, David Jones is limited in extending its reach. Significant (above 6%) online sales will also be hard to achieve.
  3. Inflexible Australian wage conditions restrict the capacity to deliver consistent high quality service at the times customers prefer to shop.

The major key to generating happy customers is a high level of personal service. On this, it’s worthwhile quoting Nordstrom’s employee manual in full:

Welcome to Nordstrom we’re glad to have you with Our Company. Our number one goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them.

Nordstrom Rules:

Rule #1: Use best judgment in all situations. There will be no additional rules.

Please feel free to ask your department manager, store manager, or division general manager any question at any time.

Reads like a Foolish manual to me!

David Jones doesn’t have all the strategic options available to Nordstrom; however the comparable basic ratios are interesting.

Nordstrom                                           David Jones

Gross Profit Margin            41.8%                                                         39%

Pretax Margin                       9.94%                                                        10.3%

Revenue per Employee*      $215,000                                                  $186,000

Return on Equity                  36.82%                                                       16.5%

Price / Earnings                   16.09                                                           14.35

Dividend Yield                         2%                                                              9.7% (grossed up)

*$A, includes casuals and part time employees.

Leaving aside the elephant in the room (sales performance) operational ratios are ok. In addition the balance sheet is very sound. An uptick in consumer confidence would be nice; however it is improving customer confidence and experience which leads to sustained increases in higher margin sales.

Foolish takeaway

Zahra has committed to continuing work on margin improvement and has been very proactive in shaking up the complacent company culture of the past. Changes to the sales mix and an increasing emphasis on service will take time to gain effective traction with customers. Once they do, David Jones should become the go-to store for both product and service quality. It could even do a ‘Nordstrom’.

At below $3 and a positive medium term outlook David Jones looks very attractively priced.

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Motley Fool contributor Peter Andersen owns shares in David Jones.

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