David Jones discounts to middle ground

On first blush the DJS results appear mild; the truth is though they are probably strong, considering market conditions.

The net profit figure of A$101.6 million excluding the A$9.1 million transaction charge for Dick Smith was well above estimates of $98 million. Stripping the Dick Smith transaction out, the figure drops to $95.2 million which is a fall year-on-year by 6.3%. However, DJS believes the new strategy around Dick Smith will see this charge recuperated over the coming financial year as it looks to revitalise this lacking category.

Revenues declined 1.2% year-on-year to $1.85 billion, which is also a slight miss on estimates, while like-for-like sales dropped 1.8% which management blames on sentiments. The revenue numbers are moderate considering the retail climate of the last six months and could be met with slight optimism.

What will please investors is gross profit margins jumped 80 basis points to 38.3%. However that is well short of the margins extracted by nearest rival Myer (MYR) which saw gross profit margins up 40 basis points to 41.7%.

This shows that in the current climate competition is still rife. DJS numbers appear to have been reached on quantity even though the company has reduced the metrics of sales events to ‘reflect a more appropriate mix full price and discount events’. That does explain the gross margin growth however the fact it is still low compared to its competitors and historical numbers suggests discount turnover is well and truly outstripping normal trading. This again gets back to current retail sentiments.

The final dividend of seven cents is a slight beat on estimates of six and a half cents which will add a little candy for income investors.

In terms of forward guidance, DJS as with MYR has not provided any specific FY14 guidance except to state the obvious that ‘challenging trading conditions will remain’. Every single retailer this financial year has used this line; Solomon Lew owner of Premier investments went one step further at PMV’s results, stating that retail companies need the RBA to step in even more than it has and cut rates almost to the bone, so as to improve sentiment and consumer spending.

Although Paul Zahra hasn’t gone as far as Mr Lew or MYR CEO Bernie Brooks, there is no doubt DJS would benefit from a lower AUD, stronger consumer confidence and increased retail spend. The FY13 result is solid considering the conditions and will see the share price bounce as DJS is still trailing MYR on a stock price comparison, but it must be noted that on fundamental retail in general it still looks constrained.

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