David Jones is dressed up and ready to go

2013 accounts demonstrate the underlying potential of this department store.

Having invested a further $78.8 million in the business over 2013, David Jones (ASX: DJS) is now nearly dressed up and ready to go. Features of the 2013 accounts include:

  • Underlying profit up slightly to $101.6 million — however reported profit of $95.2 million is down 5.8% on 2012 due to charges (inventory writedowns, etc.) associated with the Dick Smith agreement.
  • Gross profit margin improved to 38.3%, despite poor winter season. By comparison Myer (ASX: MYR) achieved a gross profit margin of 41.7%.
  • Closing inventory was down 6.6%, indicating sound controls are in place.
  • Earnings per share came in at 18c (after Dick Smith adjustments). A 17c per share dividend was fully franked.

There’s no real secret about a well-run retail business — knowledgeable service, an appealing range of products and good inventory management just about covers it. David Jones is making steady progress with these goals — investment in staff training continues to increase, and highly productive personal shopping consultants are employed in the major stores.

With the increasing emphasis on fashion and beauty, the price harmonisation program is just about complete and exclusive deals with successful brands continue to increase.

A negative to be faced in 2014 is the profit-guaranteed joint venture with American Express, which has now converted to a profit-sharing arrangement. Management has confirmed this is likely to result in a 50% fall in earnings before interest and tax for the financial services segment.

Progress is being made with private label merchandise and the intention is to have 5%+ of sales private label by the end of 2014. As private labels earn a higher gross margin, David Jones has been very slow off the mark with this strategy.

Interestingly, property holdings are valued at a net $1.15 per share. Management has indicated that the Market Street store in Sydney may be first in line should any development involving the airspace proceed.

David Jones has now established advanced and robust online channels and platforms. Sales are increasing rapidly (off a low base) with a 711% increase in the last quarter. Average order size is three times in-store transactions. Pre-depreciation, online channels are expected to deliver a profit in the first full year of operation.

Foolish takeaway

Since 2010, David Jones has transitioned from being an old fogey retailer with antiquated systems to a contemporary multi-channel merchandiser. Although there is still more to be done, Paul Zahra and his team have laboured through one of the worst retail downturns in our history. With high leverage to increasing business and consumer confidence David Jones may be seeing its boat come in. Investors have welcomed the result with the share price rising 6% on heavy turnover. David Jones is definitely one for the watchlist.

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Motley Fool contributor Peter Andersen owns shares in David Jones.

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