Is David Jones Limited a Buy?

Solid half-year results could be the turning point.

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David Jones Limited (ASX: DJS) has been a fairly average investment over the last five years. After hitting a high of nearly $6 back in 2009, the company has failed to break out of the $2 to $4 range since mid-2011. It’s current trading for around $3.30 and has returned 37% over five years, an average annual return of 6.5%, well below that of the ASX 200 which has returned an average of 11.2% annually.

But that could be set to change!

David Jones on Wednesday released its half-year results to the end of December 2013. For the first time in what seems like an eternity, the company reported positive like-for-like sales over the previous corresponding period. On-again off-again CEO Paul Zahra described the result as “stellar” and a “momentous occasion”.

While I agree that turning David Jones from a diminishing force into a stable force in the retail sector is a very good effort, I think the 4.6% decline in net profit on revenues that increased by 3.8% is really far from a stellar result.

Rather, it is the solid platform from which David Jones can make stellar results in the future, from which the momentous occasions could flow if management can execute and consumers return to their stores. Paul Zahra has done a good job so far, and now that the ruckus at board level appears to be settled, the only complicating factor in the near term is the persistent commentary about a merger with rival Myer Holdings Limited (ASX: MYR).

Without adding too many more words to the debate, it would seem silly for David Jones to entertain a merger with Myer – a company that is expected to deliver a much larger drop in profit and revenue on Thursday.

So is David Jones a buy?

Do you believe that Paul Zahra and his team can successfully lure cashed-up shoppers back into their marble-lined stores? Personally I’m not convinced. Outsourcing the electronics side to Dick Smith Holdings Ltd (ASX: DSH) was a masterstroke, as the company hadn’t made any decent money from that since the heyday of government stimulus in 2008-9. Focussing on high-value clothing is a good strategy, however not only are they competing with Australian speciality stores and designers, overseas designers and retail chains are coming to Australia in droves. Mr Zahra will have to find a way to beat them too.

Foolish takeaway

David Jones will face many challenges in the next three to five years. The company wants to grow online sales to 10% of sales by 2017-18, which will negate the need to get customers into stores for sales, however the company is well behind rivals when it comes to having a serious online presence. But at the end of the day, for me, it comes down to one question I can’t answer: Why would a 20 to 35-year-old guy go into David Jones? It wouldn’t be for Dick Smiths, that’s for sure.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned

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