Australia | Mar 16 2010
By Chris Shaw
With sales results for the first half of FY10 already released and given guidance of 10% profit after tax growth for the period, there is a relatively narrow range of forecasts for upmarket retailer David Jones ((DJS)) for its interim profit result due this Wednesday.
Citi is expecting a net profit after tax of $100 million and Credit Suisse is slightly higher at $101 million, with RBS Australia splitting the difference with a forecast of $100.3 million. Given a surprise is unlikely, RBS suggests the quality of the result and the sustainability of any margin expansion will be the major points of interest for the market.
With respect to margins, Credit Suisse suggests performance on costs will be a key and it expects continued cost improvements to be evident in the result. Citi agrees, taking the view some staff reductions and improved supplier terms are likely to deliver some additional cost savings in the period.
According to RBS Australia, this should be enough to allow management to lift its 'aspirational' gross margin expectation to a range of 40-41% from 39.5-40% previously, with some upside risk in the short-term.
Longer-term RBS suggests there should also be improvement from an ongoing focus on costs via a number of programs both underway and complete where benefits have yet to flow through to earnings.
On Citi's numbers, EBIT (earnings before interest and tax) margins will to rise by 77 basis points to 11.6% for the Department Store segment, reflecting management's continued focus on containing operating cost growth. Citi suggests progress has been made in this regard in areas such as media buying and non-merchandise procurement.
But while guidance from David Jones is for 2H10 profit growth of 5-10%, Citi is forecasting an increase of 3%, noting the challenge in coming months will be to cycle profit growth that last year benefited from fiscal stimulus measures.
This caution is evident in the stockbroker's full year earnings per share (EPS) forecast of 32.3c, rising to 34.6c in FY11. In comparison, both Credit Suisse and RBS Australia are forecasting higher EPS outcomes, the former at 34.1c and 38.1c respectively and the latter at 33.8c and 38.1c for FY10 and FY11.
Consensus full year EPS forecasts for David Jones according to the FNArena database stand at 33.2c for FY10 and 36.6c for FY11.
Along with the result, RBS Australia suggests there could be an update on the sales growth forecast for 2H10 given David Jones is now six weeks into the period, while RBS also sees scope for some update on the store growth profile in coming years.
The margin outlook remains the key for investors in its view however, RBS taking the view any uplift in the market's long-term gross margin expectations could see a re-rating of the stock.
Leading into the result, RBS Australia retains its Buy rating, Credit Suisse has an Outperform recommendation and Citi rates the stock as a Hold. Overall, the FNArena database shows David Jones is rated as Buy four times, Accumulate once, Hold four times and Underperform once.
The average price target according to the database is $5.30, while David Jones shares today are slightly higher and as at 11.50am the stock was up 4c at $5.08. This average target price implies around 4% upside from current levels.
