This retailer has a margin problem

The retail business is all about margins. Investors expect low margins from supermarket retailers like Woolworths (ASX: WOW), but they expect fat margins from posh retailers like David Jones (ASX: DJS).

That’s why it’s so striking that David Jones’ margins lag some its considerably less-posh competitors. Here’s a look at the problem.

Outperformed by Myer, Premier Investments and even Billabong

For instance, competing department store Myer (ASX: MYR) has expanded its gross margins by nearly 5 percentage points since 2008 – though net margins have shrunk over this same period. David Jones’ gross margins have barely budged over this same period, and its net margins are still lower than Myer’s today.

As another point of comparison, Premier Investments (ASX: PMV) enjoys much higher gross and net margins than those of David Jones, despite the company’s concentration in “fast fashion” and accompanying low price points in many of its stores. Even Billabong’s (ASX: BBG) gross margins are 10 percentage points higher.

But there’s a silver lining to this cloud

The good news is, David Jones’ management finally seems interested in addressing the problem. Just this week, the company announced a deal that will see Dick Smith take over its in-store and online electronics business. As a result of the deal, David Jones will earn a fixed percentage of sales – not profits, thankfully, given the notoriously tough consumer-electronics business – while Dick Smith assumes the risks in running the business.

And further, as The Australian Financial Review reported today, “David Jones will reduce its exposure to low-margin categories such as whitegoods, travel goods and stationery by refurbishing and shrinking new stores rather than outsourcing departments.”

The bottom line for Foolish investors

Between the Dick Smith deal and these other initiatives, David Jones may be able to improve its margins and overall profitability in the next several years. There’s certainly room enough for improvement.

That’s not to say that David Jones shares are a buy today. In fact, at The Motley Fool, we’ve got what we believe is a much better idea. You can get all the details now, for FREE, by clicking this link. Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool writer/analyst Catherine Baab-Muguira owns no shares in any company mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.