Stock of the Day – David Jones  (DJS)

S&P Dow Jones Indices have recently announced that it will be removing David Jones (DJS) from the S&P/ASX 200, subject to the final court approval of the proposed scheme of arrangement under which the company will be acquired by Woolworths Holdings Limited. David Jones will be replaced by Greencross Limited  (GXL) in the S&P/ASX 200 after the close of trading on July 18, 2014.


DJS Financial Highlights  (Source – Company Reports)

Scheme meeting of David Jones was held in Sydney on 14^th July, 89.64% of David Jones shareholders were present and voting (either in person or by proxy). 96.81% of votes were cast in favor of the resolution. We are inclined to believe that Woolworths’s management suggestion that it’s a$130m synergy estimate is conservative. On private label, the higher price point and lower import duty on Australian apparel means that DJS should be able to generate a high gross margin at price points offering good value within an upper end Australian department store context.


DJS Operating Income (Source – Company Reports)

We do however think it could take a number of seasons for Woolworth’s private label to gain brand equity in Australia. Woolworth’s has included no gains from rationalization of store space in its synergies, this appears to be an opportunity given that DJS seems over spaced. We believe that the property value can be unlocked from the property portfolio given : A) The A$612 is a two year old valuation, excluding potential upside should the Market Street property be redeveloped from 11 floors to 20. B) Both the two Sydney and two Melbourne stores could be consolidated into one store in each city.


DJS Daily Chart (Source – Thomson Reuters)

The internet has lowered barriers to entry across the retail landscape and this is evidenced by relatively low sales growth reported by David Jones despite a resurgence in consumer confidence and rising house values. We expect competition for discretionary consumer dollar will rise as the market increasingly fragments with international retailers looking to enter the Australian market, utilizing online and limited show case store networks. We put a SELL recommendation on the stock at the current price of $3.98.

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