Retailing: David Jones Looks At Earnings, Sales Fall, Has New Online Ideas

David Jones hasn't been competitive with the emerging online retailing sector for years, and in the past six to eight months, its efforts in the analogue retailing space haven't been too flash either.

In fact the company has looked weak and without any idea as sales fell and earnings dropped.

And drop they have, in the six months to the end of January sales were off more than 6%, earnings almost 20%.

And there's worse to come with earnings for the full 2012 financial year likely to be as much as 40% down on those for 2011.

So the pressure has been on the retailer 'to do something', preferably something online with a bit of pizzazz and oomph, while trying to halt the slide in sales and the erosion of margins and the bottom line.

So yesterday David Jones has revealed how it plans to make itself relevant and competitive in the online world, while halting the developing slide in sales and earnings from its traditional department store business.

It will be a big ask and won't have an impact for a year or more.

And it's no wonder the market is sceptical about the online strategy and worried about the weak trading outlook, especially when the new strategy's costs will weigh on the already weak earnings of the group.

So the shares were sold down 27c to $2.46, or nearly 10%. The shares hit a low of $2.37 for the day.

The 10% fall in the share price yesterday was two thirds of the 15% rise so far in 2012 as the investment community mistakenly looked for the company and other retailers to start reporting better results.

As for the online move, there were a lot of fine words, but the amount of action seems slow.

Just look at how slowly the retailer is moving to expand its online offering- that will take a year or more.

The company said it will expand the number of items available online from 9,000 to 90,000 by the first quarter of 2013, with more comparison and review capability by this Christmas.

In a couple of statements yesterday, the struggling upmarket department store chain announced: the not unexpected near 20% drop in first half net profit; the unexpected forecast for a larger profit fall for the full year; it would build six or more new stores and indicated that it had settled on a new online strategy .

The new online strategy grabbed all the attention, naturally given all the publicity over the growth on online purchases by Australian consumers, while retailers such as DJs and Harvey Norman have been seeing falling sales and profits.

It's called an "Omni-channel" strategy. Already 200 new staff have been employed across its information technology, digital and operational divisions, David Jones said in yesterday's statement to the ASX.

So what is Omni-channel? Well, Gerry Harvey, that serial moaner about all things online and competition, is another to have grabbed the Omni-channel bug for his struggling Harvey Norman chain.

It's big overseas, most notably at Macy's the huge US department store chain, as a story in a February edition of The Economist revealed.

"Macy's is embracing "omnichannel" integration, that is, selling stuff on television, through mail-order catalogues and online, as well as keeping its department stores. The company runs 810 shops across America under the mid-price, mid-market Macy's brand and 38 posher Bloomingdale's outlets.

"In January last year it said it would add nearly 3,500 full-time, part-time and seasonal staff to its online team. It is building a new logistics centre for online sales in West Virginia and expanding an existing one in Tennessee. And it is fixing a glaring flaw in its internet-sales operation: until now online shoppers have only been able to buy goods in Macy's warehouses; soon they will be able to order items from the stock of its stores."

That's similar to what David Jones is attempting.

The driver for the David Jones is the realisation that the previous strategy (devised by former CEO Mark McInnes, now running retail for Solomon Lew's Premier Investments, which reports on Friday) of lifting profits by 5% during a downturn, hasn't worked.

David Jones revealed, first half profits fell by nearly 20% to $85 million as first-half revenue slumped 6.7% to $1.011 billion.

David Jones also forecast that profit after tax would be down by 35% to 40% for the full 2011-12 financial year, which is nasty.

But despite that bad news, the company is still paying an interim dividend of 10.5c a share, down from the 13c interim for the 2010-11 financial years, but still a substantial payment to shareholders.

But that won't last and with the second half looking very weak, shareholders can expect a lower final dividend later in the year.

And if sales continue to be weak and costs rise, the dividend could be in jeopardy.

But can this Omni-channel idea really be a solution?

One supporter is the The Harvard Business Review in the US. It said in a story last December, that it's an idea struggling retailers should grab.

"Digital retailing is quickly morphing into something so different that it requires a new name: omnichannel retailing.

"The name reflects the fact that retailers will be able to interact with customers through countless channels-websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions, networked appliances, home services.

"If traditional retailers hope to survive, they must embrace omnichannel retailing and also transform the one big feature internet retailers lack-stores-from a liability into an asset.

"They must turn shopping into an entertaining, exciting, and emotionally engaging experience by skillfully blending the physical with the digital.

"They must also hire new kinds of talent, move away from outdated measures of success, and become adept at rapid test-and-learn methodologies."

Sounds like the solution, doesn't it?

But as always, the problem will be in the execution, not in the theory, and whether consumers want to be interacted with in this way.

But it's obviously what David Jones wants.

Therefore it's no wonder David Jones said yesterday it was "investing in technology and realigning its processes & structures. The Company will increase its online SKUs from 9,000 to 90,000 before Christmas 2012. Its OCR offering will integrate the shopping experience across sales channels (i.e. physical stores, web-store, mobile applications, contact centre, social commerce platforms) to enable customers to choose how and when they engage with David Jones, supported by integration and investment in its marketing channels (traditional and digital)."

And as part of that new strategy, there's more of that on "customer service and engagement by further investing in customer service & experiences that will differentiate it from competing retailer".

And it plans to open six new stores and spend $70 to $80 million a year in capital spending.

That's a reliance on 'bricks and mortar' (and not very different from rival Myer) when it should be really spending the money embracing the online environment through its existing outlets.

Several smaller format stores will be opened as well.

The six new full line stores will take the number of outlets of that six of 42 nationally, plus the handful of smaller outlets.

The retailer says this expansion program will be financed out of cash flow, but it is going to weigh on the company's costs of doing business for several years, as will the move to expand its online offering.

But it seems odd that to be expanding heavily in 'bricks and mortar' in the face of weak sales (down 6.7% in the first half) and prospects of more to come as the online world strips the company of sales and profits in products like perfume and make up, not to mention white goods, electronics and clothing and footwear.

In the US the glum outlook for bricks and mortar retailers was nicely summed up by the Economist story:

"Whatever priorities retailers set, their physical stores are likely to shrink as the share of sales made online keeps rising. Retailers in America have a surfeit of space.

"Between 1999 and 2009 the amount of shopping space per person boomed from 18 square feet to 23 square feet.

"The productivity of that commercial acreage slumped after the financial crisis and shows no sign of recovering."

We in Australia have too many shops as well and too much unproductive retail space.

Just remember all those chains that have collapsed or been restructured: Borders and Angus and Robertson, Colorado, Clive Peeters, WOW in Queensland, Sleep City and the biggie, Dick Smith which will be slimmed and sold by Woolworths.

And, finally there's the question of David Jones' single most profitable business, the credit card venture it has with Amex and which, in its current form, ends next year.

The news wasn't good: David Jones said the business has been "exposed to prevailing weak discretionary retail spending".

This, the company said could result in a halving of earnings before interest and tax in the 2014 financial year when its alliance with Amex converts to share of underlying profits.

That means earnings from retail will be under even greater pressure, as will the entire company as directors see little chance of strong growth in retail sales for 2012 and beyond.

It won't be until 2014, two years hence, that some sign of profit growth could start appearing sufficient to offset the higher costs from the new strategy and the loss of earnings from the change to the financial services venture with Amex.

"The Company expects it's Growth Initiatives and the Strengthening of its Core Business to deliver incremental EBIT in FY14 that will offset the adverse impacts on EBIT of increasing Costs and the conversion of the Financial Services business into a sharing of underlying profits.

"The Company's plan beyond FY12 is formulated on the basis that LFL (like fir like)sales growth is relatively flat and on that basis, expects moderate PAT growth.

"Upon a recovery in retail sales, the Company is well placed to enjoy an acceleration in that growth," the company said.

That's a hope, not an expectation.