The battle to get people back shopping at David Jones department stores and whet the appetite of would-be predators began in earnest today when the company put a $612 million value on its four flagship buildings in Sydney and Melbourne, which equates to half its current market capitalisation.
Department stores have long been tagged dinosaurs and the 40 per cent fall in the net profit of David Jones for 2012 did little to allay those thoughts, particularly given its poor internet strategy, addiction to discounting and foolhardy decision to reduce costs by cutting staff, which resulted in poor customer service.
In an attempt to redress some of these issues David Jones is spending up big by adding 100 new staff, investing in better technology platforms, investing in a merchandising planning tool to ensure products get to the right stores at the right times, clearing out excess inventory and launching a whizz bang internet site in the first quarter of next year.
The costs associated with these initiatives explain part of the 40 per cent fall in profit for the full year to $101 million; the rest is explained by falling sales as customers deserted the stores.
There is a structural change going on in customer shopping patterns and department stores have been the biggest victims. In Australia David Jones and Myer have been laggards in embracing online shopping and are now realising it isn’t a fad but a structural change.
Its decision to hire US property consultant Wakefield and Cushman, which is run by former Centro boss Glenn Rufarno, to value its property is a smart one. Unlike Myer, David Jones has a property portfolio that is very valuable but has a book value of $460 million.
This has not been properly reflected in the company’s share price and attracted a lot of speculation about the value when a bogus takeover offer was made with the pitch that it was a property break-up play.
While that takeover offer evaporated as quickly as it came, the chances of a trade buyer or private equity operator doing the numbers on David Jones is high. There has been much speculation that retailers including Solomon Lew are looking at Myer and David Jones.
By getting Cushman & Wakefield to put a value of $612 million on the four buildings based on a theoretical leasing of $39 million a year will give potential predators some food for thought.
It went further and said the value would be more if the stores were refurbished including adding levels to each of the buildings and offering residential or office space.
David Jones is hamstrung to sell the properties and lease them back as it would generate a big capital gains tax bill. This would not be so for a trade buyer which could buy the company, sell the property and lease it back. David Jones market cap is currently $1.18 billion and it has a small amount of debt.
Like Myer, David Jones refused to give guidance for 2013 but it is likely to be similar to its 2012 earnings given it will lose 50 per cent of its earnings from its credit card business.
In a teleconference, its boss Paul Zahra said he was reluctant to give guidance given he didn’t know what the second quarter would bring, which has two big shopping events Christmas and January sales.
“There is also macro uncertainty which makes it hard to make forecasts,” he said.