David Jones Ltd. (DJS), Australia’s second-largest department-store company, is studying a possible sale of its flagship Sydney and Melbourne outlets for A$612 million ($640 million) as full-year net income fell 40 percent.
Consultants Cushman & Wakefield have been appointed to “investigate opportunities to unlock and enhance the value” of the Sydney-based company’s property portfolio, David Jones said in a statement alongside its annual results today. The stores have 85,000 square meters of floor space and could be rented for A$39 million a year, the company said.
Stagnating sales and tightening profit margins have halved profit at David Jones since 2007, driving the company’s market value to an eight-year low compared with that of its assets. Net income in the year ended July 28 fell to A$101 million, the bottom end of the company’s forecast of a drop of between 35 percent and 40 percent.
“If you can sell the asset off with a really low rental and have it secured, that’s going to be good for them,” Sean Fenton, a portfolio manager at Tribeca Investment Partners Pty. in Sydney, said by telephone. “I’m not sure there’s a huge amount of demand to buy that sort of asset out there.”
Tribeca’s assets under management don’t include David Jones shares.
David Jones declined 0.4 percent to A$2.26 at the close in Sydney trading, while Australia’s benchmark S&P/ASX 200 index gained 0.5 percent.
Cushman & Wakefield conducted a review to provide an indication of the potential sale price of the stores assuming a lease to David Jones or an equivalent tenant, the department-store owner said in its statement.
The company is also examining opportunities to redevelop the flagship stores, which account for about a quarter of sales. It plans to update the market in six months, David Jones said.
“It’s not in our intention to sell the buildings at all,” Chief Executive Officer Paul Zahra told a media briefing after the results. “We’ve had no discussions with any potential property partners.”
The estimated A$612 million valuation of the stores on Elizabeth Street and Market Street in Sydney and Bourke Street in Melbourne is about half of David Jones’s current market valuation of A$1.19 billion.
Myer Holdings Ltd. (MYR), Australia’s largest department-store company, has no significant property assets and has a current market value of A$1.18 billion. Net income fell to A$139 million in the year ended July 28, from A$160 million in the prior 12-month period, Myer said in a statement on Sept. 13.
David Jones said full-year sales dropped 4.8 percent to A$1.87 billion. That’s the lowest level since 2006, according to data compiled by Bloomberg.
Gross profit margin of 37.5 percent was the narrowest since 2004, the data show. The profitability measure was depressed as management pushed through discounts to improve sales and clear excess stock, David Jones said.
The company didn’t provide a forecast for this fiscal year.
The estimated A$39 million annual rent for the space equates to an investment return of about 6.4 percent and a charge of A$459 per square meter for the properties, according to a calculation by Bloomberg.
That compares with about A$8,700 per square meter for the best retail locations in Melbourne and A$11,500 in Sydney, according to data provided in May by CBRE Group Inc.
David Jones was founded in 1838 by a Welsh-born immigrant selling buckskin, gingham and silks, according to the company’s website. The company moved its main outlet to the seven-story art deco building on Sydney’s Elizabeth Street in 1927.
It transferred the stores in Sydney and Melbourne to Deutsche Bank AG through a sale-and-leaseback agreement in 2000. David Jones reacquired them in September 2006 for A$362 million to regain control of redevelopment and avoid rising rents.
The value of David Jones’s latest strategy depends on whether it is able to do anything worthwhile with the money raised, Tribeca’s Fenton said.
“They could crystallize a bit of cash but there’s not a huge economic imperative to do so,” he said. “The potential is to unlock greater value without hurting your business too much, but it’s a bit of a tricky balance.”
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