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David Jones Faces Brand Damage After Losing Chief

David Jones Ltd. CEO Paul Zahra
Newly appointed CEO of David Jones Ltd. Paul Zahra pose in this handout photograph provided to the media on June 21, 2010. Source: David Jones Ltd. via Bloomberg

David Jones Ltd., Australia’s second-largest department-store operator, faces possible damage to its brand and may struggle to retain management after chief executive Mark McInnes resigned for “unbecoming” conduct.

New Chief Executive Officer Paul Zahra has to contend with media coverage of McInnes’s departure and “potential negative impact on trading and damage to the David Jones brand,” Grant Saligari, an analyst at Credit Suisse Group AG, said in a note to clients.

Credit Suisse downgraded the stock to “underperform” from “outperform” and cut its target price to A$4.50 from A$5.30 after McInnes, 45, quit on June 18, apologizing for his behavior toward a female colleague. “The change in CEO increases risk around retention of other senior management team members,” Saligari said.

David Jones’ stock had surged fourfold since 2003, when the top job went to McInnes, who emulated the success that overseas chains such as Bloomingdale’s had with international designer brands. McInnes, who was often photographed with celebrities, signed agreements with companies including Polo Ralph Lauren Corp. and Bottega Veneta owner PPR SA to lure affluent shoppers.

David Jones declined 0.4 percent to A$4.47 at the close of trading Sydney today, extending its slide this year to 17 percent. While it dropped as much as 4.7 percent on June 18 after McInnes’s resignation, the stock traded at A$4.49, down by 0.44 percent, by the time the market closed on that day.

Long-Term Direction

“The long-term direction of a company in retail isn’t driven by the product but by the skill and the merchandising and the ability of the people who lead the company -- it’s literally a business based on choice,” said Mark Ritson, associate professor of marketing at the University of Melbourne. “Wherever Mark goes next, as I’m sure he will in the next 12 to 24 months, he’ll take half of the people on his team.”

Zahra worked in retailing for 28 years and joined David Jones in 1998 in a range of roles including supply chain management and merchandising.

He was part of the team that executed McInnes’s strategy since 2003 that saw David Jones focus on luring richer clients with designer goods. The Sydney-based retailer, founded in 1838, became the exclusive Australian department-store outlet for brands including Ralph Lauren Home, Ted Baker, and PPR labels Bottega Veneta and Yves Saint Laurent.

David Jones has been the best performing retailer in the benchmark S&P/ASX 200 in the past seven years.

Cost of Business

In Zahra’s previous role of group general manager of stores and operations, a key responsibility was to lower the cost of doing business, Craig Woolford, an analyst at Citigroup Inc. said in a June 18 note to clients.

McInnes had shut the retailer’s unprofitable gourmet food operation and cut costs for getting goods into stores.

Chairman Robert Savage said he expected the company to suffer from the departure of McInnes. “He was seen as the leader of the team and as a major player,” Savage told reporters in Sydney on June 18. “Clearly, our brand suffers as a result of this.”

Staff morale in an organization whose leader’s behavior proved unacceptable may be a bigger hurdle than damage to the company’s brand, said Fariborz Moshirian, professor of finance at the Australian School of Business. “It’s more the morale and the spirit in the organization that would be shattered rather than customers not buying anything from David Jones.”

McInnes was the subject of a complaint from a female worker about his behavior toward her at two company events since late May, said Savage, describing the incidents as “regrettable.”

McInnes won’t receive any of his contracted incentive payments, the company said, a sum that Savage said was worth “several million dollars.” He’ll receive a settlement of A$1.5 million ($1.3 million) and statutory entitlements, such as accumulated annual leave, worth A$445,000.

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