David Jones Forecasts Smallest Profit Since 2006 on Costs

David Jones Ltd. (DJS), Australia’s second-largest department store chain, forecast its smallest profit in six years as rising costs, falling sales, overseas competition, and the strong Australian dollar crimp earnings.

David Jones slid as much as 13 percent, the most in eight months, in Sydney trading after saying net income will fall between 35 percent and 40 percent in the year through July. The forecast implies earnings between A$101 million ($106 million) and A$109 million, as much as 28 percent below the average of 11 analyst estimates compiled by Bloomberg.

Stalling consumer spending is curbing demand for designer fashions as shoppers take advantage of a higher Australian dollar to buy from overseas websites, while earnings from David Jones’ credit card unit are set to halve. Chief Executive Officer Paul Zahra plans to increase the number of online product lines 10-fold, to give a bigger range than Macy’s Inc., in an attempt to win back customers.

“This is something they should have addressed a long time ago,” Chris Weston, an institutional trader with IG Markets in Melbourne, said by phone. “David Jones is a good brand but you can get everything so much cheaper online now.”

The Sydney-based retailer’s shares fell by 11 percent, Australian cents, the biggest decline since July 14, to close at A$2.43. David Jones was halted from trading in the previous two days.

Rising Consumer Imports

While Australia’s economy grew faster than the U.S. and euro zone last year thanks to a commodity-led boom, the household sector has struggled as costs rise, while an increase in the nation’s currency to record levels exposed retailers to cheaper overseas competition.

The country’s consumer imports rose to their highest level on record in January, contributing to the first trade deficit in 11 months. Retail sector employment fell in February to the lowest level in 21 months, with 35,400 jobs having been lost in the sector over the past year.

“There are patchwork pressures in our economy,” Treasurer Wayne Swan told reporters at a press conference yesterday. “Not every business or every worker is in the fast lane of the mining boom.”

Offshore Internet stores including Amazon.com Inc. (AMZN) and Asos Plc. are providing free delivery to Australia to take advantage of the nation’s currency, while overseas department stores such as Saks Inc. now ship to the country.

More Than Macy’s

Christian Dior’s J’adore Eau de Parfum sells for A$180 in 100 milliliter bottles on David Jones’ online store, 75 percent more than the A$103.07 price of the same sized bottle at the Australian version of Nordstrom Inc.’s online store.

“These are the toughest retail conditions that I’ve seen in my career and I’ve been in retailing 30 years,” Chief Executive Officer Paul Zahra told a media conference after announcing results.

David Jones will increase the number of products available through its website to 90,000 from the current 9,000, giving it a wider range than sold online by Macy’s Inc. (M), it said in a presentation.

It had negotiated 15 percent cuts in prices across the full range of products made by Fossil Inc. and Donna Karan, as well as larger discounts on some products made by Kiehl’s Inc. and Yves Saint Laurent, the company said.

Pricing Challenge

By expanding the website, the company plans to grow online sales to about 10 percent of total revenue from less than 1 percent now. Neiman Marcus Group Inc. and John Lewis Plc both get more than 16 percent of their sales online, it said.

“Whilst this is an admirable statement and a necessary repositioning, there is a big challenge to get the right pricing, range,” Grant Saligari, an analyst at Credit Suisse Group AG, said in a report today.

Applications for Apple Inc.’s iPhone and iPad and Google Inc.’s Android devices would be introduced by Christmas this year, enabling customers to buy directly, David Jones said. The company will also add six new department stores and an unspecified number of new smaller-format shops.

Today’s proposal is the first long-term strategy released by Zahra after a 2008 plan by his predecessor failed to generate promised total annual profit growth of at least 5 percent “throughout downturns in the economic cycle.” The 2008 strategy didn’t include an online plan.

Earnings Decline

The company today reported a 20 percent drop in first-half earnings to A$85 million in the six months ended Jan. 28. Sales during the period fell 6.7 percent compared with a year earlier. The full-year forecast implies the weakest annual profit since 2006, when the company earned A$81 million, according to data compiled by Bloomberg.

Earnings before interest and tax from department stores dropped 23 percent to A$101.3 million in the first half while profit from financial services climbed 8 percent to A$24.5 million.

Financial services accounted for 19 percent of operating income at David Jones last financial year with the company operating a venture with American Express Co. (AXP)

A 2008 agreement by American Express to underwrite earnings from the venture ends this year. With the venture shifting to a profit-sharing model in the 2014 financial year, “the company expects its share of the Ebit generated by this business to be broadly half the Ebit contribution in 2013,” David Jones said.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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Photographer: Ian Waldie/Bloomberg

Customers walk through David Jones Ltd.'s Elizabeth Street store in Sydney.

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Photographer: Ian Waldie/Bloomberg

Customers walk through David Jones Ltd.'s Elizabeth Street store in Sydney. Close

Customers walk through David Jones Ltd.'s Elizabeth Street store in Sydney.

Photographer: Ian Waldie/Bloomberg

Paul Zahra, chief executive officer of David Jones Ltd. Close

Paul Zahra, chief executive officer of David Jones Ltd.

Photographer: Ian Waldie/Bloomberg

David Jones today reported a 20 percent drop in first-half earnings to A$85 million in the six months ended Jan. 28. Close

David Jones today reported a 20 percent drop in first-half earnings to A$85 million in the six months ended Jan. 28.

Photographer: Ian Waldie/Bloomberg

Customers browse cosmetics inside David Jones Ltd.'s Elizabeth Street store in Sydney. Close

Customers browse cosmetics inside David Jones Ltd.'s Elizabeth Street store in Sydney.

Photographer: Sergio Dionisio/Bloomberg

Stalling consumer spending has curbed demand for designer fashions at David Jones and crimped profitability while the company’s financial services unit today forecast profit would halve. Close

Stalling consumer spending has curbed demand for designer fashions at David Jones and crimped profitability while the... Read More

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