Industry group Retail Business risk High HOLD David Jones is a leading upmarket retail department store with 37 stores throughout Australia and specialises in high end brands of clothing, cosmetics and homewares. It’s only major competitor, Myer, has strengthened its position in the retail industry and has kept pressure on David Jones.
David Jones’ competitive strategy relies on its product differentiation through exclusive brand names supply arrangement, customer loyalty and reputation. However, the company and the retail industry are currently suffering and will remain in future years from online Strong Buy Buy $1. 85 Hold $2. 75 Sell $3. 10 Strong Sell $1. 70 competition, a decline in consumer sentiment and poor economic conditions. In addition, the expiry of the contract with American Express credit cards in FY14 is forecasted to cause a severe fall to its earnings.
Consequently, David Jones would have to prepare for the difficult conditions ahead by focusing on cost-cutting and investing capital in alternative shopping channel such as the web-store. The financial analysis reveals that David Jones has marginally become less liquid and less working capital efficient since inventory turnover has decreased and would have difficulties paying their debts in future assuming the weak retail condition continues. Although Myer’s sales figures are greater, David Jones has been the better performer with respect to Net Profit Margin, indicating that they are more cost efficient.
The accounting analysis reveals similarities between David Jones and Myer’s accounting policies but no concrete evidence of earning manipulation from management. Our valuation estimates David Jones’ intrinsic value at $2. 20. A negative sales growth is forecasted in the assumptions to reflect the challenging prospects of the retail industry. As of the 30th of May, the current price of David Jones closed at $2. 25. ASB Investment Research recommends a HOLD position for this share price.
The retail industry has not been a shining light of the Australian economy over the past few years as it faces some of the worst trading conditions in 50 years (Hutton, 2012). As shown from the graph below, department stores, the clothing section and the footwear section have been suffering a decline of 6% since FY09 in contrast to steady growth in volume across the remaining retail industries (Bald, 2012). According to the Australian Bureau of Statistics, February retail trade figures showed department stores experienced a year-on-year decrease of 2. % while the clothing and retail sector took a 2% drop and even household goods declined by 0. 5% (ABS, Retail Figures, 2012).
This permits a certain degree of judgments, which provides the management of David Jones the opportunity to manipulate the numbers for reasons such as reputation, management pay-per-performance and pressure to avoid negative news. Suspected account to earning manipulation Inventory Cash and cash equivalent at end of financial year Inventory 2011A a $000 8,760 10,838 2010A a $000 14,649 10,885 David Jones has increased inventory in recent years, such as FY11 is 2. 3% higher than FY10. However, comparing with cash equivalents in FY10 ($14,649), David Jones almost has halved their cash to $8,760 million.
From FY09, David Jones has continued to stock inventory despite cash difficulties since the GFC. The reasons of increased inventory could be due to manipulation to decrease COGs to increase earnings, deliberated overvaluing of inventories, or signalling of expected high sales in the future. However, under the weak retail environment, it is unlikely that sales will increase and hence it is doubtful that management have manipulated inventory. 2011A 2010A a $000 256 534 153 Allowance for Doubfult Debt
Age Analysis of Receivables Less than 30 days overdue and not impaired More than 30 days but less than 90 days overdue and not impaired More than 90 days overdue and not impaired a $000 5,738 1,047 1,068 Compared with FY10, there is a tenfold increase in receivables on overdue periods, thus exposing David Jones to credit to risk. This reflects the current credit condition of customers struggling to pay their debt. Even though, based on the credit history, David Jones expected to receive these amounts, it is likely that the receivables are overstated and the related allowance understated.
Based on the valuation, ASB Investment Research recommends a HOLD position for David Jones. As of the 30th of May, the current price of David Jones closed at $2. 25. Our valuation estimates David Jones’ intrinsic value at $2. 20. Several methods were used to evaluate the share price of David Jones. After careful consideration, we have allocated 90% weighting to the DCF method ($2. 24) and 10% weighting to the Dividend Discount Model ($1. 85). The Discounted Abnormal Earnings method produced a nearly identical figure to the DCF ($2. 23).
Meanwhile, the Multiples analysis provided a good comparison of key measures against Myer. The similarity between the current share price and our evaluation figure leads ASB Investment Research to recommend a HOLD position. The average 5 year shareholder return for this share is -9. 6% and the future for David Jones is not looking especially bright. The company is forecasted to experience negative profit growth over the next 3 years given online competition, declining consumer sentiment, transformation expenses and deteriorating financial service earnings.
David Jones has further announced that it is likely to suffer a 35% fall in NPAT. The current EPS of 31 cents is expected to fall by 5 to 10 cents in the next two years. Based on our findings, David Jones’ strength is structured from a strong balance sheet and a low leverage level. The financial analysis reveals that David Jones has marginally become less liquid and less working capital efficient since inventory turnover has decreased and would have difficulties paying their debts in future assuming the weak retail condition continues.
Nonetheless, management has planned strategies to respond accordingly to the evolving retail industry structure. It plans to focus on a cost-cutting plan and to integrate the shopping process through various innovative sales channel such as the online website. From FY15 onwards, we anticipate a more optimistic prospect for David Jones as the company will benefit from Omni Channel retailing (website, mobile applications) as well as the recovery of the economy and the retail sector.
R E F E R E N C E S
- Australian Bureau of Statistics, Retail Trade 2012, February Figures, Canberra. ASX, www. axs. com. au (Accessed 15th April, 2012)
- Bald, A 2012, ‘Business and Economic Outlook: Australia 2012’, AFG Venture Group, http://www. afgventuregroup. com/dispatches/afg-venture-group-newsletter/business-and-economicoutlook-australia-2012-andrew-bald-associate-director-agribusiness-afg-venture-group/ (Accessed 20 April, 2012).
