Financial Report for David Jones Essay

The purpose of the report is to valuate the performance of David Jones Ltd through a fundamental analysis. The report consists of strategy Analysis, accounting Analysis, financial Analysis and prospective Analysis. According to the analysis, a healthy and effective operation can be identified. The value of DJSs is calculated by three different methods using the result from the forecast.

Finally a recommendation of buy for the stock of DJSs is made based on the analysis report. 0. 0 Introduction After the shock by financial crisis, the global economy is experiencing a relaxed period, consumer spending tends to increase over years and revive the retail industry.

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David Jones Ltd (DJs) as one of the top companies in the industry is performing well. This report will focus on the recent performance of David Jones Ltd and analyse the public information and numerical data that DJs Ltd provides. Besides the value of DJs will be calculated by three different methods.

The report includes five main parts: Macroeconomic analysis, Accounting analysis, Financial analysis, Prospective analysis and finally with a recommendation that is helpful for investors to make decisions for investing in David Jones Ltd.

1. 0 Macroeconomic Analysis According to Australian Bureau of Statistics (ABS), through 2011 the GDP growth was 2. 3 %(Australian Bureau of Statistics 2011). Due to the financial crisis in 2008, most countries around the world experienced economic downturn, the cash rate set by Reserve Bank of Australia (RBA) fell by 50 basis points during the whole year in 2011 (table1. 1).

On the other hand, the inflation rate is relative low as the RBA announced that it is 1. 6% a bit lower than the target inflation rate of 2%-3% (table. 1. 2)(Reserve Bank of Australia 2012). The exchange rate does not have obvious change; in this case, the export goods and services during 2011 rose by 0. 8% (Australian Bureau of Statistics 2011). 1. 2 Industry Analysis 1. 2. 1 Rivalry among Existing Organisations At first, according to ABS’s households expenditure survey, the expenditure from June 2009 to June 2010 increased 38% compared to the last survey conducted in 2003-04(Australian Bureau of Statistics 2010).

This is good news for department store industry: the increased spent from households would positive relate to the growth rate of the industry. In the next place, for department store industry in Australia, the main competitors for DJs is BigW, Kmart, Target and the most competitive company Myer. To consider the relative size of the organizations, DJS and Myer are two dominant companies in this industry. On the other hand, the concentration of brand retail stores, which sell the same products as department store, is relative high.

Thirdly, although the range of products of departments stores is differentiated, considering the high concentration of other brand retail stores which are also included in department stores, the switching costs for consumers are relative low. Besides, online shopping is another reason of the low switching costs to consumers. The last aspect is that the most assets in the industry are their products, consequently, they are not specialised and the exit barriers for this industry is low. 1. 2. 2 New Entrants Threat

Due to the high costs of developing new channels, the entry barriers for the industry is relative high and the first mover advantages are obvious. 1. 2. 3 Substitute Products Threat The range of products of the industry is wide; as a result, customers are able to consume the same products in different stores. Therefore the threat of substitute is quite high. 1. 2. 4 Bargaining power Due to the fact of price sensitivity is high, consumers are willing to consume identical product with lower price; they stand on a strong bargaining position.

On the contrary, suppliers have relative strong bargaining power because the high concentration of the industry. 1. 3 Competitive strategy analysis In the DJs annual report 2011(David jones Ltd 2011), the major differentiation from their competitors is their “home of brands” strategy and continually updating the brand portfolio and offering exclusive brands in order to reinforce the position as Australia’s fashion authority. “As an example in retailing in Australia, DJs has succeeded on the basis of differentiation by emphasizing exceptionally high customer service. (Palepu et al. 2010, pp. 37). For a customer who is willing to buy a g-star shirt, DJs provides a wide range of products including this shirt and offers consumers options without additional spend. DJs has been achieving a competitive advantage for its differentiation. 1. 4 SWOT Analysis 1. 4. 1 Overview SWOT analysis includes the analysis of strengths, opportunities, weakness and threats. It could help the firm to choose the competitive strategy. 1. 4. 2 From the Internal Perspective Firstly, customer service is one of the most important elements for competitive advantage.

DJS has developed their customer service by adding specific staff training. Secondly, the wide range of domestic and international brands and convenient location for the target customer also became one of the organisation’s strengths. Moreover, the credit card business of DJs cooperated with American Express has generated huge profit for their shareholders, the earning for 2002 increased by $4. 3 million to $14. 9 million (David Jones Ltd 2002). In contrast, the total sales were declined by 4. 4% from 2010 to 2011 and basis earning per share (EPS) decreased 2. % likewise. This weakness may lead to the loss of the confidence of external investors (Table 1. 3). 1. 4. 3 From the external perspective According to the report by RBA (2011), the online spending has grown at an average annual rate of more than 15% since 2005. As DJs has repositioned the online store, this could be a valuable opportunity. Refer to the annual report 2011 of DJs, the organization has developed risk management and internal control to avoid the possible threat in 11 categories. The effective control environment includes 13 detailed procedures.

Besides, DJs may face the threat of macroeconomic factors such as the economic downturn, increasing labour price, rent, and other costs. The industry has experienced the worst two years from 2009 to 2011 in the past 20 years, the accumulated sales fell by 3. 3 %(David Jones Ltd 2012). 2. 0 Accounting Analysis The purpose of accounting analysis is to assess the accounting quality of the financial statement of David Jones Ltd (DJs) and to disclose accurately present its business situation based on the company’s Annual Report. 2. Key Accounting Policies 2. 1. 1 Critical Success Factors It is necessary for an organization to identify the factors that successfully achieve its mission. David Jones as the oldest continuously operating department store and it currently has 37 stores located in most Australian states and territories, which definitely has the key to success. 2. 1. 1 Cost Control Cost leadership means the lowest cost of operation in the industry. David Jones Ltd is cost leadership due to its style of business. It helps DJs gain bargaining power with suppliers.

A low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share. 2. 1. 2 Customer Service DJs has increased its investment in customer service initiatives in 2011. For example DJs increased its investment in frontline service hours as a relative proportion to sales. It is also introducing an increase in the quantum of payment made under the “Reward and Recognition” incentive designed to encourage employees to drive sales and productivity.

In addition, new training initiatives are being introduced for all floor staff regardless of tenure, which will focus on ensuring sales assistants are continually trained in delivering superior customer service 2. 1. 3 Effective Use of Assets Asset turnover measures a firm’s efficiency at using its assets in generating sales or revenue. During 2011, DJs’s asset turnover is 161. 52% and Myer is 134. 83%, even though Myer’s revenue and total asset is higher than DJs, DJs is doing better in generating sales or revenue than Myer. Moreover, DJs also provides its accounting policies to achieve its objective. . 2 Accounting Policies 2. 2. 1 Property, Plant and Equipment An item of property, plant and equipment states at its cost less any accumulated depreciation and any accumulated impairment losses, which is similar as Myer. DJs uses the straight-line depreciation method, where parts of an item of property, plant and equipment have different useful lives; they are accounted for as separate item of plant and equipment over its useful lives. However, Myer may have different residual value of its asset. 2. 2. 2 Inventory According to AASB 102, inventories are assets held for sale in the ordinary ourse of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Moreover, the finished goods on hand or in transit are stated at the lower of cost and net realizable value with cost primarily being determined using the retail inventory method that is the same as that of Myer but Myer’s cost is determined using the weighted average cost method. 2. 2. 3 Revenue Recognition David Jones recognizes its revenue in four sections sales revenue, disruption allowance, financial services, and interest.

Sales revenue is recognized when significant risks and rewards of ownership is transferred to the buyer along with legal entitlement and revenue from gift cards is acknowledged when a customer uses his gift card and the balance of cards is fully or partially redeemed to purchase goods by the customer, Disruption allowance represents a reimbursement for rent incurred during a major refurbishment and compensates with the associated loss of sales and gross profit as it is received as a result of building works under the sale and leaseback arrangement.

Financial Service fees revenue is related to the establishment of customer loans is deferred and recognized over the expected life of the instrument on an effective interest rate basis, Revenue from interest is recognized as the interest accrues. 2. 3 Key Accounting Flexibility 2. 3. 1 Property, Plant and Equipment (PPE) David Jones consolidated entity depreciated its property, plant and equipment use the straight-line basis over the estimated useful lives, for instance, leasehold improvements’ useful live could be estimated between 10-25 years, and this depreciation amount will be effected on the income statement. . 3. 2 Revenue Recognition David Jones acquires low flexibility in changing accounting policies of revenue and David Jones is a retail industry and has no other options of recognizing revenues but to follow rules set by AASB. 2. 4 Accounting strategy For the Property, Plant and Equipment (PPE), David Jones consolidated entity reviewed and adjusted the assets’ residual values and useful lives at each Balance Sheet date if appropriate. And this accounting strategy is able to reduce the recognition of expense and increases net profit during the financial year.

David Jones recognizes revenue when it is probable that economic benefits will flow to the entity. The company uses accrual accounting that means it considers revenue when the sale is occurred not when the payment is received. However for Myer total sales value presented on the income statement represents proceeds from sale of goods from sales. Revenue from the sale of goods, excluding lay-by transactions, is recognised at the point of sale and is after deducting taxes paid, and does not include concession sales. Myer’s share of concession sales is recognised as income within other operating revenue at the time the sale is made.

Interest income is recognised on a time proportion basis using the effective interest method. Dividends are recognised as revenue when the right to receive payment is established. It is hard to tell which one is better, but this is what management of David Jones considers. 2. 5 Quality of Disclosure The financial statements are general purposes financial statements that are prepared according to Australian Accounting standard (AASB). The disclosure provides up to date material developments to a wide range of users such as shareholders and investor in making economic decisions.

The annual report does not state the reason of using these policies, but just address the significant of accounting policies. DJs annual report also provides discussions on the results of their company’s performance by product and service type for the financial year. During the financial year, the segment accounting policies had not been changed that may effect on the segment information. The employee benefit policy in David Jones has built for nearly ten years. This policy helped to measure the performance of employees, executive directors and non- executive directors, and motivate them through monetary and non-monetary benefit.

In addition, the employee benefit policy in the annual report of this company is specified. In summary, the financial statement provides true and fair financial report for users. Potential red flags will be explained in financial analysis. 2. 6 Undo Distortions David Jones does a good job in their footnotes and also explains the reason of changes has occurred, so that customers are assured of their accounting practices. The financial reports are explained well in the footnotes in detail. Therefore, there is no reason undoing any accounting information. 3. Financial Analysis 3. 1 Financial Ratio Analysis In this part, the variety of financial ratios will used to analyze several important aspects of DJs including liquidity, solvency, profitability and efficiency. And Myer is chosen to be a competitor because of the same size of business. 3. 1. 1 Analyzing Liquidity The short-term liquidity ratios indicate the firm’s ability to meet short-term obligations. Next, current ratio and quick ratio will be used to measure this ability of DJs and Myer. Table 3. 1 shows the current and quick ratios for DJs and Myer.

Current ratio is current assets divided by current liabilities. It was increasing stably for DJs while the current ratio of Myer was less than one and was fluctuating during the three years. For DJs the total current asset decreased slightly while the current liability decreased by 17. 7 percent. For Myer, from 2009 to 2010 the cash increased by 420 percent so that the current ratio increased by 100 basis points while from 2010 to 2011 the current ratio decreased again as cash returning to the normal level makes the current assets decreased.

The indicator of Myer was less than one in the three past years, which could suggest that the firm had negative working capital and was probably facing a liquidity crisis Quick ratio is current assets minus inventories, divided by current liabilities. It is a more stringent measure of liquidity because it does not include inventories and other assets that might not be very liquid. A high ratio allows little dependence on the sale of inventories to meet current obligations. In Table 1, the quick ratio of DJs experienced a stable decreased trend from 0. 6 to 0. 14 during the three years. However, the movement of the current ratio was mimicked by the quick ratio for Myer. This ratio was highest in 2010 and lowest in 2012 (Table 1). 3. 1. 2 Analysing Solvency Solvency ratios measure a firm’s financial leverage and ability to meet its long-term obligations. Solvency ratios including various debt ratios that are base on the balance sheet and coverage ratios that are base on the income statement. Table 2 shows the financial leverage, D/E ratios and interest coverage ratio for DJs and Myer.

Debt-to-equity ratio is calculated by dividing total debt by total equity, it shows the financial flexibility and the capital structure of the company. For DJS, the debt-to-equity ratio decreased from 14. 82 percent in 2009 to 13. 97 percent and increased from 13. 97 percent in 2010 to 16. 8 percent in 2011. Compared to Myer, the ratio was higher though it decreasing from 56. 50 percent to 48. 71 percent during the three years. This indicated that Myer had a higher level of debt as a source of financing than that of DJs as the total equity of DJs increased by 14. 27 percent from 2009 and 2011.

Financial leverage ratio is average total assets divided by average total equity, and it is also an indicator of a firm’s use of debt financing. Financial leverage ratio of DJs decreased from 163. 99 percent in 2009 to 154. 63 percent in 2011. While the ratio of Myer was higher though it decreased from 251. 22 percent in 2009 to 227. 88 percent in 2010 and increased slightly by 1. 76 percent in 2011. The result of financial leverage ratio was the same as that of the D/E ratio: Myer preferred to rely on debt as a source of financing. In detail, the total debt, 419. 6 million, of Myer was 3. 2 times the size of DJs.

Interest coverage ratio is calculated by dividing earning by interest and tax by interest expense, this ratio helps determine the firm’s ability to repay its debt obligation. For DJs, the interest coverage ratio was in reliable level of average 32. 55 during the three years though it decreased slightly by 3. 23 in 2011. While the ratio of Myer was not favorable because of the average 5. 44 during the periods, but an increasing trend in that might be good news. 3. 1. 3 Analyzing Sales and Profitability Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity, and capital.

Several ratios will be used as following. Table 3 shows net profit margin, ROE and ROA for DJs and Myer. Net profit margin is found by dividing net income by revenue, and this is a important operating ratio which looks at how good management is to turn the efforts into profits. For both companies, the gross profit margin was experiencing an increasing trend during the three years. The ratio of DJs increased from 7. 67 percent in 2009 to 8. 33 percent in 2011 while the ratio of Myer increased from 3. 19 percent to 5. 86 percent during this period.

The reason of the lower this ratio of Myer might be higher operating expenses for each year given the same level of sales (2834 million for Myer and 2017 million DJs in 2011). Return on assets (ROA) is calculated by dividing net income plus after tax interest expense by average total assets, it is used to measure operating performance independent of financing. It is not sensitive to the leverage position of the firm. This ratio for both companies is fluctuating but it is in a smooth range. The ratio of DJs increased from 14. 46 percent in 2009 to 14. 70 percent in 2010 and decreased to 14. 9 percent in 2011. While the ratio of Myer increased from 9. 08 percent in 2009 to 9. 97 percent in 2010 and decrease to 9. 59 percent. The lower this ratio for Myer is because it had a huge amount of goodwill, average 363 million as twelve times as that of DJs in 2010 and 2011, leading to a higher level of total asset and total equity. Return on equity (ROE) is determined by dividing net income minus preferred stock dividends by average common stockholders’ equity, it is used to measure the return to common shareholders after subtracting operating expenses and cost of debt financing and preferred stock.

For DJs, this ratio increased from 14. 46 percent in 2009 to 14. 70 percent in 2010 and decreased again to 14. 29 percent. Compared to Myer, the movement of the ratio is the same as that of DJs, but the average amount is 9. 55 percent. ROE can be decomposed into ROA and financial leverage. The lower ROE of Myer was attributable to a much more weight in lower ROA though Myer used relatively higher financial leverage. 3. 1. 4 Analyzing efficiency The efficiency of the firm can be measured by activity ratios including days of receivables, days of payables, days of inventory and assets turnover.

The Table 4 shows days of receivables, days of payables, days of inventory and assets turnover for DJs and Myer. Asset turnover ratio is found by dividing revenue by average total assets. For both companies, the ratio was decreasing in this period. The ratio of DJs decreased from 180. 94 percent in 2009 to 166. 09 percent in 2011. While the ratio of Myer decreased from 176. 11 percent in 2009 to 140. 36 percent in 2011 as increasing the amount of total assets from 1854 million in 2009 to 1978 million in 2011. A decreasing amount of asset turnover ratios suggested that both companies had an ncreasing amount of capital tied up in its asset base. Days of inventory is calculated by 365 dividing by inventory turnover, it is the average days of inventory on hands. This ratio of DJs increased from 43. 82 days in 2009 to 52. 26 days in 2011 as the average inventory increased in the period making a decrease in the inventory turnover. The movement of this ratio of Myer is the same as that of DJs. That is from 39. 69 days in 2009 to 50. 12 days in 2011. Days of receivables is found by dividing 365 by receivable turnover, it is average number of days it takes for the company’s customers to pay their bills.

The ratio increased from 0 in 2009 to 1. 89 in 2011 as sale decreased slightly by 4. 27 percent leading to a decrease in the receivable turnover. While, the ratio of Myer was fluctuating and decreased from 3. 69 days in 2009 to 2. 06 days in 2011 and increased to 2. 15 days in 2011. Days of payables is determined by dividing 365 by payables turnover, it is the average amount of time it takes the company to pay its bills. The ratio of DJs decreased from 48. 68 days in 2009 to 39. 16 days in 2011 as the average payables decreased leading to an increase in payables turnover.

Compared to Myer, the ratio increased from 52. 43 in 2009 to 54. 7 in 2011 as the purchase decreased making to a decrease in payables turnover. 3. 2 Analysis of the balance sheet The balance sheet of DJs states its financial position at the end of fiscal year. The balance sheet consists of assets, liabilities and equity. Table 1 shows common size balance sheets for all accounts of DJs for 2009, 2010 and 2011. In a common size balance sheet, each item of the balance sheet is listed as a percentage of total assets. 3. 2. 1 Current assets

Cash and cash equivalent and receivable account as percent of total assets remained constant, 1 percent and 2 percent respectively. But the amount of net receivable from supplier increased from 8633000 dollars in 2010 to 10463000 dollars in 2011. The age of account receivable is that how long ago the sale that started the receivable was made. For DJs, in 2011 80 percent were current or less than 30 days. Compared to 2010, this decreased from 92 percent. 10 percent were from 31 to 90 days old and another 10 percent were from 90 days old which all went up compared to that of 2010.

From 2009 to 2010, current assets increased by 13 percent. Most of the growth occurred in inventories. Inventories as percent of total assets increased from 22 percent to 24 percent. But the amount of percentage was unchanged in 2011. 3. 2. 2 Non-current assets Property, plant and equipment as percent of total assets were smooth in the three years. PP&E increased 5 percent from 2010. The items of land and buildings and integral plant, plant and equipment, computer equipment and fixtures and fittings increased by 21 percent, 200 percent, 38 percent and 32 percent, respectively.

Deferred tax assets decreased by 21 percent as gift card non-redemption provision and share based payment decreased sharply compared to prior data. 3. 2. 3 Current liabilities Current liabilities decreased by 15 percent between 2010 and 2011. The largest decrease was in trade payable used for inventories. Payable as percentage of total asset decreased from 20 percent in 2010 to 18 percent in 2011. Besides, other current liabilities including current tax liabilities, provisions, financial liabilities and other liabilities all decreased by different percentages. 3. 2. Long-term debt Long-term debt increased by 27. 7 percent from 2010 to 2011 and increased by 1 percent from 2009 to 2010. As a percentage of total assets, long-term debt ranged from 8 percent to 11 percent with much more unsecured bank loan taking in 2011. 3. 2. 5 Equity Total Equity to total assets indicates the percentage of the company’s assets owned by the shareholder, with creditors claiming the rest. For DJs the percentage of ownership increased from 61 percent in 2009 to 65 percent in 2011. Equity of DJs consisted of contributed equity, reserves and retained earnings.

Each of them was increasing during the three years. 3. 3 Analysis of the income statement The income statement shows an entity’s revenues, expenses, gains and losses during a reporting period. Table 2 presents a common size income statement for DJs for 2009, 2010 and 2011. 3. 3. 1 Revenues Looking first at revenues, which is recognized when earned. The revenues of DJs were from department store and financial services. The revenue of DJs increased by 3. 4 percent from 2009 to 2010 while it went down by 4. 4 percent in 2011 as the revenue from external customer decreased by 4. percent from 2010 to 2011. 3. 3. 2 Cost of sales Cost of sales represents the largest single component of expenses. As a percentage of revenues, the cost of sales of DJs increased from 60 percent in 2010 to 61 percent in 2011. But the actual amount of cost of sale increased by 3. 5 percent 3. 3. 3 Operating expenses Operating expenses were divided into four main categories including employee, administrative, general, depreciation and interest. Employee benefits expenses consisted of salaries, wages and benefits, and the expenses, down 10. 6 percent from 2010, experienced a decreasing trend during this period. Lease and occupancy expenses of DJs were, being in an average level of 172 million, fluctuating, which increased from 157 million in 2009 to 182 million in 2010 and then decreased to 178 million in 2011. Depreciation and amortization expenses, advertising and marketing expenses, administration expenses and net financial expenses all ranged between 0 percent to 2 percent as value of percentage of revenues. 3. 3. 4 Net income For DJs, net income as a percentage of revenues increased by 1 percent in 2011.

However the actual amount of net income, up to 171 million from 2009 and down to 168 from 2010, was fluctuating slightly during the three years. The impact of that might stem from the changed in revenue. 3. 4 Analysis of the cash flow statement The cash flow statement provides information beyond that available from the income statement, which is based on accrual accounting, rather than cash accounting. The cash flow statement can be divided into three parts: cash flow from operating activities (CFO), cash flow from investing activities (CFI) and cash flow from financing activities (CFF).

Table 3 shows the cash flow statement of DJS for 2009, 2010 and 2011. In table 3, CFO of DJs was positive for the three years while CFI and CFF were negative for this period. Generally speaking, this pattern of cash flow is strong and reliable, which generates enough cash from operations to fund capital investments, and repay debt or buy back stock. This is a very healthy company typically at a mature stage of growth, or growing moderately. In detail, CFO of DJS increased by 6. 74 percent from 2009 to 2010 but then it went down by 10. 5 percent in 2011. The reason of this change might be an increase, 12. million, in receipt from customers in 2010 and then a decrease, 21. 5 million, in that in 2011. Besides net interest paid has remained at 7. 15 million in the past two years. In CFI, the payment for PP&E, using to sell and produce goods, was the largest investment for the period, which was only cash outflow in CFI. And DJs sold some PP&E leading to an increase in CFI in 2010. In CFF, the most of cash were used to pay dividends. The amount of cash used to paid dividend increased from 107 million in 2009 to 130 million in 2011 as borrowing increased in the past year.

Especially the dividend yield, 11. 38%, was higher the average level of 3. 63% in sector and 4. 62% in market. And DJs paid off prior debt and did not borrow any funds in 2009 while the borrowing increased from 1 million in 2010 to 28 million to 2011 and no any debt repaid. Besides DJs did not issue any bonds or new shares. It only relied on external financing. Table 5 shows working capital, free cash flow to the firm and free cash flow to equity for DJs (2009-2011). The management of working capital of DJs was favorable because of the amount of this item increasing year by year.

Consequently it has flexibility to invest in long-term assets for future growth. The free cash flows for all equity and debt holders decreased by 18. 06 percent from 2010 to 2011. But the whole tendency was increasing, and the cash flows were enough to make interest and principal payments to debt holders and to pay dividends and buyback shares from equity holders. The movement of the free cash flows for all holder mimicked by the free cash flows for equity holders, increasing by 260 percent from 2009 and 3 percent from 2010.

The huge difference between the increase rates could attribute to a decrease in net debt issuance (170 million) in 2009. 4. 0 Prospective Analysis 4. 1 Forecasting assumption Based on the information we have gathered, the OECD countries experienced economic downtown since GFC. The recovery of the economy needs a long time of period and it will fluctuate in following years. However Australian economic has being recovering, since the booming mine factor, employment remaining robust, consumer confidence remaining strong. Companies focusing on discretionary spending, such as David Jones, are in a not bad position.

On this basis, it is reasonable expect that the sales growth will trend upwards, but in fluctuation situation in following years, it will remain stable in the long-run, around 6%, since the effect of competition within the industry. David Jones ‘s sustainable strategy is differentiation rather than cost leadership, NOPAT margin will be range the normal level in the long run, 7%. Working capital will be built up as a result of the expected economy recovery. Since the viable locations for new stores become increasingly scarce in Australia and New Zealand, the ratio of long-run assets to sales will decline in the long run.

Detailed forecasting display in the appendices (Table 4. 1&4. 2) 4. 2 Valuation The current share price of DJSs= 2. 19 Method Discounted FCF Discounted Discounted FCF To equity abnormal Earing to capital The estimate value per share 2. 49 2. 69 2. 77 Overvalued or undervalued undervalue undervalue undervalue The detail of the calculation displays in the appendices (4. 3&4. 4). 4. 3 sensitivity analysis Required return of shareholder 0. 10 0. 13 0. 4 Terminal growth rate 0. 1 0. 4 0. 5 Overvalued or undervalued undervalue undervalue undervalue 5. 0 Conclusion and Recommendation In this report we valuated the performance of DJSs from four aspects that are strategy analysis, accounting analysis, financial analysis and prospective analysis. According to information and data we have acquired, we strongly recommend all investors to buy this stock. Even though the long-run growth is only 1%, the estimated value per share also reveals that the DJSs can provide something of value to the investors.

And then other valuable information from the annual report indicated that many significant investment institutions hold the share of DJSs, they account for around 44 per cent, the analyst from these companies are confident that David Jones have a sustainable profit in the future. 6. 0 Reference Australian Bureau of Statistics 2011, 5206. 0-Australian National Accounts: National Income, Expenditure and Product, Dec 2011, viewd 15 April 2012, <http://www. abs. gov. au/AUSSTATS/[email protected] nsf/Latestproducts/5206. 0Main%20Features2Dec%202011? opendocument&tabname=Summary&prodno=5206. &issue=Dec%202011&num=&view=>. Australian Bureau of Statistics 2011, 5206. 0 – Australian National Accounts: National Income, Expenditure and Product, Dec 2011, viewed 15 April 2012, <http://www. abs. gov. au/AUSSTATS/[email protected] nsf/Latestproducts/5206. 0Main%20Features3Dec%202011? opendocument&tabname=Summary&prodno=5206. 0&issue=Dec%202011&num=&view=>. David Jones Ltd 2011, Annual Report 2011, Syney. Palepu, KG, Healy, PM, Bernard, VL, Wright, S, Bradbury, M & Lee,P 2010, Business Analysis and Valuation- Using Financial Statements, 1st edn, South Melbourne, Victoria Australia.

Reserve Bank of Australia 2012, Inflation Target, viewed 15 April 2012, <http://www. rba. gov. au/inflation/inflation-target. html>. Reserve Bank of Australia 2011, Box B: Online Spending by Households, viewed 15 April 2012, <http://www. rba. gov. au/publications/smp/2011/feb/html/box-b. html>. David Jones Ltd 2012, DAVID JONES ANNOUNCES ITS FUTURE STRATEGIC DIRECTION, viewed 15 April 2012. 7. 0 Appendices Table 1. 1 Effective Date| Change in cash rate (percentage points)| New cash rate target percent| | | | 7-Dec-11| -0. 25| 4. 25| 2-Nov-11| -0. 25| 4. 5| 3-Nov-10| 0. 25| 4. 75|

CPI| Q1| Q2| Q3| Q4| 2010| 171| 172. 1| 173. 3| 174| 3-Jul-05| 176. 7| 178. 3| 179. 4| 179. 4| 2012| 179. 5| ? | ? | ? | Table 1. 2 Table 1. 3 KEY ITEMS| FY11| FY10| % Change| | | | | Sales $(M)| 1961. 7| 2053. 1| -4. 4| Total EBIT| 246. 5| 249. 2| -1. 1| PAT| 168. 1| 170. 8| -1. 5| Basic EPS| 33| 34| -2. 9| Full year dividend per share| 28| 30| -6. 7| Table 3. 1 ?Figure1| DJS Limited (DJSS)| Myer Holdings Limited (MYR)| ? | Jul-09| Jul-10| Jul-11| Jul-09| Jul-10| Jul-11| Current Ratio| 0. 97| 1. 05| 1. 23| 0. 77| 0. 87| 0. 81| Quick Ratio| 0. 16| 0. 15| 0. 14| 0. 17| 0. 23| 0. 12| Table 3. 2 DJS Limited (DJSS)| Myer Holdings Limited (MYR)| ?| Jul-09| Jul-10| Jul-11| Jul-09| Jul-10| Jul-11| Financial Leverage| 163. 99%| 160. 56%| 154. 63%| 251. 22%| 227. 88%| 229. 64%| Gross Gearing (D/E)| 14. 82%| 13. 97%| 16. 80%| 56. 50%| 48. 97%| 48. 71%| Net Interest Exp. Cover| 27. 63| 36. 62| 33. 39| 2. 61| 6. 46| 7. 25| Table 3. 3 ?| DJS Limited (DJS)| Myer Holdings Limited (MYR)| ?| Jul-09| Jul-10| Jul-11| Jul-09| Jul-10| Jul-11| Net Profit Margin| 7. 67%| 8. 11%| 8. 33%| 3. 19%| 5. 58%| 5. 86%| ROE| 22. 77%| 22. 95%| 21. 41%| 14. 09%| 19. 07%| 19. 05%| ROA| 14. 46%| 14. 70%| 14. 29%| 9. 08%| 9. 97%| 9. 59%|

Table 3. 4 ?Table 4| DJS Limited (DJS)| Myer Holdings Limited (MYR)| ? | Jul-09| Jul-10| Jul-11| Jul-09| Jul-10| Jul-11| Asset Turnover| 180. 94%| 176. 12%| 166. 09%| 176. 11%| 149. 90%| 140. 36%| Days Inventory| 43. 82| 48. 97| 52. 26| 39. 69| 43. 97| 50. 12| Days Receivables| 0| 1. 5| 1. 89| 3. 69| 2. 06| 2. 15| Days Payable| 43. 68| 42. 41| 39. 16| 52. 43| 54. 53| 54. 7| Table 3. 5 Table 5 ($000)? | 2011| 2010| 2009| Cash flow before working capital| 234511| 229691| -153674| Free cash flows for all holders| 105923. 9| 129262. 2| 98193. 1| Free cash flows for equity holders| 128921| 125260| -77556| Table 4. 1

Capital Structure 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 % % % % % % % % % % % of debt 17 18 19 20 20 20 20 20 20 20 % of capital 83 82 81 80 80 80 80 80 80 80 Cost of capital Debt% 4. 3 4. 3 4. 3 4. 3 4. 3 4. 3 4. 3 4. 3 4. 3 4. 3 Equity% 11. 83 11. 83 11. 83 11. 83 11. 83 11. 83 11. 83 11. 83 11. 83 11. 83 WACC% 10. 55 10. 55 10. 55 10. 55 10. 55 10. 55 10. 55 10. 55 10. 55 10. 5 Sales growth Rate 3. 0 1. 0 2. 0 3. 0 6. 0 6. 0 6. 0 6. 0 6. 0 6. 0 NOPAT Margin 8. 3 8. 0 8. 5 8. 0 7. 0 7. 0 7. 0 7. 0 7. 0 7. 0 WC to Sales 3. 0 4. 0 5. 0 6. 0 8. 0 8. 0 8. 0 8. 0 8. 0 8. 0 LT assets To sales 45 44 43 42 40 40 40 40 40 40 Debt Ratio 17 18 19 20 20 20 20 20 20 20 Dividend Rate 16. 6 16. 6 16. 6 16. 6 16. 6 16. 6 16. 6 16. 6 16. 6 16. 6 Table 4. 2

Income statement ($‘000) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (continuing) Sales 1,961,744 2,020,596 2,040,802 2,081,618 2,144,067 2,272,711 2,409,074 2,553,618 2,706,836 2,869,245 3,041,400 Net Profit After tax 167,709 163,264 176,938 171,525 170,453 168,635 178,753 189,479 200,847 212,898 -Net interest expense After tax (7090) (7582) (8163) (8851) (9382) (9945) (10541) (11174) (11,844) (12,554) Net income 160,619 155,682 168,775 162,674 161,071 158,690 168,212 178,305 189,003 200,344 -Preferred Div — —- —- —- — — — — — —- = Net income To common 160,619 155,682 168,775 162,674 161,071 158,690 168,212 178,305 189,003 200,344 Beginning balance sheet ($‘000) Beginning net Working capital 60,618 81,632 104,080 128,644 181,817 192,726 204,289 216,547 229,540 243,312

Beginning net Long-term assets 909,268 897,953 895,096 900,508 909,084 963,630 1,021,447 1,082,734 1,147,698 1,216,560 = net operating Assets 969,886 979,584 999,176 1,029,152 1090901 1,156,356 1,225,736 1,299,281 1,377,238 1,459,872 Net debt 164,880 176,325 189,843 205,830 218,180 231,271 245,147 259,856 275,447 291,974 +Preference Shares —- —- —- —– —– —— —– —— —– ——-

Opening Equity 781559 805006 803,259 809,333 823,322 872,721 925,085 985589 1,039,425 1101791 1,167,898 =Net Capital 969886 979584 999176 1029152 1090901 1156356 1225736 1299281 1377238 1459872 + Profit 160,619 155,682 168,775 162,674 161,071 158,690 168,212 178,305 189,003 200,344 -Dividend Distribution (133631) (133341) (134349) (136671) (144872) (136964) (163608) (172545) (182897) (193871) +/- equity

Issues (28715) (16014) (20437) 23396 36165 38778 49232 56606 60001 63600 = Closing Equity 803,259 809,333 823,322 872,721 925,085 985,589 1039425 1101791 1167898 1237971 =Net capital ( Closing) 979,584 999176 1029152 1136355 1156356 1225736 1299281 1377238 145987 1547464 Ratios ROA 17. 27 16. 64 17. 68 16. 64 16. 66 16. 66 16. 66 16. 66 16. 66 16. 66 ROE 19. 95 19. 38 20. 85 19. 76 18. 46 17. 5 17. 15 17. 15 17. 15 17. 15 Book value Of asset growth 3. 0 1. 0 2. 0 3. 0 6. 0 6. 0 6. 0 6. 0 6. 0 6. 0 Book value of Equity growth 3. 0 -0. 2 0. 8 1. 7 6. 0 6. 0 6. 0 6. 0 6. 0 6. 0 Net operating Asset turnover 2. 08 2. 08 2. 08 2. 08 2. 09 2. 08 2. 08 2. 08 2. 08 2. 08 Cash flow Net income 160619 155682 168775 162674 161071 158690 168212 178305 189003 200344 Change in working Capital (1766) (21014) (22448) (24564) (57173) (10909) (11563) (12255) (12996) (13772) -change in long-term Assets (26483) 11316 2856 (5412) (8576) (54546) (57816) (57817) (64964) (68862) +change in Debt 4802 11445 13,518 15,987 12,350 13,091 13,876 14,709 15,591 16,527 =free cash flow To equity 137172 157,429 182,901 148,685 111,672 106,326 112,709 122,942 126,634 134,237

NOPAT 167709 163264 176938 171525 170453 168635 178753 189479 200847 212898 -change in working Capital (1766) (21014) (22448) (24564) (53173) (10909) (11563) (12255) (12996) (13772)\ -change in net long-term Assets (26483) 11316 2856 (5412) (8576) (54546) (57816) (57817) (64964) (68862) Free cash flow To capital 139,460 153,566 157,346 141,549 108,704 103,180 109,374 119,407 122,887 130,264

Equity valuation 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (continuing) Abnormal Earning 65387 60656 73031 65275 57828 49252 51617 55341 58661 62182 Abnormal ROE (%) 8. 12 7. 55 9. 02 7. 93 6. 63 5. 32 5. 32 5. 32 5. 32 5. 32 =free cash flow To equity 137172 157,429 182,901 148,685 111,672 106,326 112,709 122,942 126,634 134,237 Asset valuation Abnormal

NOPAT 65387 60656 73031 65275 57828 49252 51617 55341 58661 62182 Abnormal ROA 6. 72 6. 09 7. 13 6. 09 6. 11 6. 11 6. 11 6. 11 6. 11 6. 11 Free cash flow To capital 139,460 153,566 157,346 141,549 108,704 103,180 109,374 119,407 122,887 130,264 Discount factor Equity 0. 8942 0. 7996 0. 7150 0. 6394 0. 5718 0. 5112 0. 4572 0. 4088 0. 3656 0. 3269 Asset 0. 9046 0. 8182 0. 7402 0. 695 0. 6056 0. 5478 0. 4956 0. 4483 0. 4055 0. 3668 PV Abn Earning 58469 48500 52217 41736 33066 25177 23599 22623 21446 20327 PV FCF Equity 122661 125883 130780 95068 63949 54361 51529 50261 46294 PV FCF Capital 126151 125654 116461 94770 65834 56525 54250 53525 49828 4. 3 CAPM Assumption RM – rf = 4. 5% rf = 5. 75% b = 1. 35 RE= 11. 83% Number Of shares 520,702,152 4. 4 Cash flow-based valuation

A long-run growth rate in continuing free cash flow = 3%, consistent with 3% long-term growth in the economy Equity valuation: Terminal value at FY2020 Present value of terminal value =FCFE2021 x 1/ (Re – g) = terminal value x 1/((1+Re)^9) =134,237 x 1/ (0. 1183- 0. 3) =555,760 = 1,520,238 Total present value= 1,296,466,000 no of outstanding shareholders= 520,702,152 Estimated value per share= $2. 49 Asset valuation Terminal value at FY2020 Present value of terminal value = free cash flow to capital x 1/ (WACC – g) =terminal value ^ 1/ ((1+WACC)^9) =130,264/ (0. 055-0. 03) =699,598 =1725351 Total present value=1442597000 no of outstanding shareholders= 520,702,152 Estimated value per share= $2. 77 4. 5 Earning based valuation Assumption: DJSs can sustain the long-run growth of 3% per year Abnormal earnings2022 =NI2021 x (1+g)- (RE xBV2021) =200344 x 1. 03-(0. 1183 x 1,167,898) =68,192 Terminal value at FY2021 PV of terminal value= Terminal value x 1/ ((1+Re) ^ 10) =AE2022 x1/(Re-g) = =772,276 Total present value=347,050,000 Beginning book value= 805,006,000 No of outstanding shareholders= 520,702,152 Estimated value per share= $2. 69

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