Australia | Jul 21 2006
By Chris Shaw
When Coles Myer (CML) sold the Myer department stores recently it was though new ownership would have an opportunity to reposition the brand and improve performance. As it turns out, the move has also given rival David Jones (DJS) an opportunity to both expand its stores and increase the number of brands it can offer exclusively in its stores.
The company has announced it will open three additional department stores between FY07 and FY09, one each in Chatswood in NSW, Chermside in Queensland and Doncaster in Victoria. ABN Amro estimates the additions will increase the company’s total floor space by about 10.5%, while UBS estimates the Burwood store will add about $45m annually to group sales, the other two stores about $60m annually.
UBS is the most bullish on the earnings impact of the new store openings, as it sees the potential for EPS accretion of about 9.8% in FY08. As a result, it is forecasting EPS to increase from an expected 18c this year to 20c in FY07 and 23c in FY08, while rating the stock as Neutral 1. The EPS upside has supported an increase in the broker’s target price to $3.10 from $2.70.
In contrast Credit Suisse is not as bullish as it notes the Chermside and Doncaster stores will be in shopping centres with Myer stores in place, requiring them to compete openly for sales. Additionally, it notes the earnings benefit of the new store openings will be diluted somewhat by the reintroduction of the dividend reinvestment plan, which should generate between $45-$60m towards development costs for the new stores but dilute earnings per share as additional shares are issued.
As a result, the broker’s EPS estimates for FY07 and FY08 are more conservative at 18.9c and 19.9c respectively, supporting its Underperform rating and $2.30 price target. These estimates are almost in line with ABN Amro, who is forecasting EPS of 18.9c and 20.2c for both years, its FY07 forecast having been revised down to account for the impact of AIFRS on group earnings.
ABN suggests the stock is fair value at current levels as it is trading on about 15x earnings for FY07, so it has lifted its rating to Hold from Sell while lifting its target price to $2.80 from $2.55.
Thomson One Analytics shows a median price target for the company of $2.68, with median EPS estimates of 20c in both FY07 and FY08. The FN Arena database shows the stock is rated as Hold by seven brokers and equity researchers, against one Buy rating and one Sell recommendation. The average target price is $2.87.
David Jones shares closed yesterday at $2.85.