Sept. 24 (Bloomberg) -- David Jones Ltd., Australia’s second-biggest department store chain, may return “excess” cash to shareholders after cutting debt and increasing earnings on sales of designer fashions and cosmetics.

Funding for eight planned new stores is “locked in” and profitability may rise further, Chief Executive Officer Mark McInnes said in a telephone interview today. The Sydney-based retailer today posted a 12 percent gain in second-half net income to A$65.4 million ($57 million).

The affluent customers that David Jones targets were encouraged to spend more by borrowing costs at a half-century low, government handouts worth A$12 billion and this year’s 26 percent surge in Australia’s benchmark stock index. McInnes is implementing 58 cost-saving initiatives to extend the retailer’s profit margin advantage over larger rival Myer Group Pty.

“It is in a sustainable department store duopoly that supports high gross margins and capital efficiency and is well managed,” Grant Saligari, an analyst at Credit Suisse Group AG in Sydney, said in a note to clients after the result. “At the right entry price, David Jones is one of our preferred retail investments,” said Saligari, who rates the stock “underperform.”

David Jones shares fell 3.9 percent to A$5.44 at the close of trade in Sydney. That pared their advance this year to 71 percent, almost triple the gain in the benchmark S&P/ASX 200 index.

McInnes reiterated his forecast for earnings in the current year to rise as much as 5 percent and said sales in the current year are ahead of budget.

“The market had very high expectations and expected that they would upgrade guidance, which they didn’t,” said Angus Gluskie, who manages about $300 million at White Funds Management Pty. in Sydney.

Real Estate

Excluding a year earlier property sale, earnings rose 36 percent in the six months ended July 25, beating a June forecast for a profit increase between 20 percent and 30 percent.

Annual profit of A$156.5 million beat the A$152.1 median estimate of four analysts Bloomberg News surveyed by telephone and e-mail.

The company paid 28 cents a share worth of dividends in the past year. David Jones paid a total of 6 cents in dividends in the 2003 financial year when McInnes took the CEO role.

“The combination of stimulus and monetary policy has been terrific for confidence,” McInnes said today.

Full-year department store earnings before interest and tax rose 5.6 percent to A$184.4 million.

The company’s department-store margin, which measures earnings as a proportion of sales, rose to 9.3 percent from 8.3 percent a year earlier. Myer, which this month announced plans for an initial share sale, has a margin of 7.2 percent.

Currency Moves

The company hasn’t gained any advantage from the rise in the Australian dollar, which this week reached a 13-month high, with most buying agreements with suppliers at fixed prices.

“They don’t change their price every month because the currency fluctuates, they have standard prices across the season,” McInnes said. “The majority of our vendors take the currency risk and the benefit.”

Earnings from financial services, which include the company’s credit-card operations, rose 7.5 percent to A$41.3 million.

To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.net

Last Updated: September 24, 2009 02:54 EDT