Company Overview - David Jones Limited is engaged in department store and on-line retailing, and offers financial services through an alliance with American Express. The Company operates in two segments: Department Stores, comprising David Jones department stores, rack stores, online and corporate office; and Financial Services, comprising the alliance between the Consolidated Entity and American Express. David Jones Corporate Services assist corporate clients with the purchase of David Jones Gift Cards for incentive programs, loyalty programs, rewards and recognition, and gifts. David Jones Gift Cards can be used across fashion, beauty, home, electrical and fine food and wine. Bridal at David Jones is offering the bridal fashion. Bridal at David Jones also ranges a collection of shoes and an assortment of jewellery.  Stores are generally located in areas of high foot traffic, such as central business districts and major metropolitan shopping centres. Competitive advantages include a well-established brand targeted towards selling premium product to the wealthiest segment of Australian population.

Analysis – David jones reported 1Q14 sales up 2.1% to 424.2 Million. Competition within the retail space has materially increased as the internet opens the door to cheaper domestic e-retailers. DJS delivered positive sales growth during the first quarter of 2014, the fastest growth in the past 12 Quarters. We believe that this is evidence company’s strategic initiatives are starting to work.
David Jones primarily operates through two reportable segments: Department Stores and Financial Services.
The Department Stores of the offers a wide array of merchandise. The segment includes company’s department stores, rack stores and corporate head office. The product portfolio includes ladies fashion, menswear, children wear, shoes, accessories, beauty products, toys, home wares, stationery, books, CDs and DVDs, small electrical items, home entertainment, home office, travel goods, gourmet and confectionery. The Financial Services segment offer David Jones store card and other related financial services. It operates financial services division through an alliance with the American Express Australia Limited. Geographically, the company operates across Australia and has presence in New South Wales, South Australia, Western Australia, Victoria, Queensland and Australian Capital Territory.

David Jones is one of the largest and the oldest department store chains in Australia, occupying a distinctive position in the market. Its wide range of international and national brands and well organised store environment has fuelled its growth. Through the corporate services, it caters to corporate clients by providing David Jones gift cards including classic gift card, insurance claim card and Christmas hampers.

This Christmas the trading appears to be solid. Electronics and clothing appears to be the best performing retail items in December and January month to date. The improvement in Christmas trading is consistent with a broader based cyclical recovery in consumer spending. Online is increasingly becoming a net benefit to DJS, recent indications on website traffic and engagement are that multi-channel is becoming a net benefit to DJS.

Electronics appears to have been one of the better performing categories in December 2013. Electronics and appliances were assisted by the switch to digital only TV, with a likely resulting increase in units of televisions in the weeks of switch to digital only TV. There did not appear to be significant discounting in the electronics and appliances categories through December. Prices appeared relatively stable from October 2013. Clothing items performed strongly, Indications are that sales and margin performance post-Christmas have been solid. The benefit of good volume and lower markdown is likely to create a combination of sales revenue growth and margin expansion. Customer traffic across CBD stores appears to have been solid for DJS.

Price		Price % Change
Close:	2.99 (31-Jan-2014)	3M:	9.93%
52 Wk High:	3.15 (16-Jan-2014)	6M:	10.74%
52 Wk Low:	2.32 (13-Jun-2013)	1Y:	19.60%

Growth in the property and equity markets through 2013 provides cause to consider the potential for a broader based recovery in household income. House prices and property transfers have historically been good lead indicators of domestic activity. A solid upturn in retail sales is established in the hardware category. Historically there has been a strong correlation between increasing property transfers and associated performance of hardware retail. Discretionary retail accelerated in the most recent November ABS retail sales data.

DJ’s first quarter 2014 sales performance stands out amongst the listed retail peers. We think this improvement is sustainable as its largely driven by internal initiatives and investments including increased staffing hours and training, online investment due to which online sales grew substantially accounting for 1%+ of group sales and should become a larger profit driver ahead, the point of sale implementation and more effective inventory management has significantly reduced their reliance on discounting. There is further addition of leading brands to entice shoppers.
 

Dividend
Yield	6.415094	FY	Payout Ratio	95.08006	FY
	6.731844	5yr Av		89.28632	5yr Av

 
Some of DJ’s most profitable stores were refurbished during FY2013 namely Elizabeth and Market street stores in Sydney along with the Bondi Junction store. Toowong Village store in QLD was refurbished as well which would have been a positive factor for the 1Q2014. Warm weather aided the sell through of seasonal product with swimwear, sunglasses and air conditioning amongst the best performing categories. We also highlight higher margin categories like fashion, cosmetics and seasonal lines continue to outperform which coupled with a more effective promotional program should ensure ongoing margin improvement.

DJS (AUD, Millions)	2013	2012	2011	2010	2009
Total Revenue	1,845.0	1,867.8	1,961.7	2,053.1	1,985.5
Total Operating Expense	1,713.7	1,724.0	1,722.4	1,811.1	1,768.1
Operating Income	131.3	143.8	239.3	242.0	217.4
Net Income After Taxes	95.2	101.1	168.1	170.8	156.5

 
The company consistently focuses on saving the cost of doing business (CODB) and has been able to generate surplus funds that may be used for new store openings, major store rebuilds, more in-store product categories, higher service offerings and several other purposes. It has a strong track record of improving its CODB and at the same time maintaining the customer service levels.

DJS	2013	2012	2011	2010	2009
Profitability
Gross Margin	37.8%	37.5%	39.1%	39.7%	39.6%
EBITDA Margin	10.7%	11.1%	15.0%	14.3%	13.6%
DuPont/Earning Power
Pretax ROA	10.6%	11.7%	19.9%	20.9%	16.4%
Pretax ROE	16.7%	18.4%	31.3%	33.9%	33.3%
Liquidity
Quick Ratio	0.14	0.14	0.14	0.15	0.15
Current Ratio	0.98	1.06	1.23	1.05	0.95

 
We expect DJS margins to benefit from a more favourable product mix and approach to markdown activity. DJ’s exposure to discretionary spending is attractive given the expected boost to income from cuts to interest rates. A faster than expected sales turnaround should complement DJ’s multiple margin enhancing initiatives which include reductions in promotions, growing higher margin products such as Fashion and beauty along with private labels. We will be putting a BUY on DJS at current price of $2.99.
 

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