David Jones Confirms Times Are Tough

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This story features HARVEY NORMAN HOLDINGS LIMITED.
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The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

First it was Harvey Norman ((HVN)) telling the market that sales conditions were very tough for retailers. Now it is the turn of David Jones ((DJS)) after the company yesterday reported a 6% decline in like-for-like first quarter sales.

The result was significantly weaker than the market had been expecting, as for example UBS had expected a fall of just 2.5%.

Conditions are not likely to improve in a hurry either, as Merrill Lynch notes the company expects full year like-for-like sales will be down by around 7.5% for the rest of FY09. In the broker’s view, the risk is things can get even worse than this.

The other risk, Merrills suggests, is earnings falling short of expectations, as the broker notes despite the falling sales, management has reiterated guidance for earnings growth of 5-10% in FY09. The broker notes this means there will have to be some serious cost savings realised to offset the fall in sales.

While some cost savings will be achieved they won’t be enough, in the broker’s view, so it has responded to the sales update by cutting its earnings per share (EPS) forecasts by 5% this year and by 7% in FY10. Citi has taken a similar view, questioning exactly where the cost savings can come from given it estimates the company will need to cut costs by $61 million to meet the midpoint of its guidance. Deutsche Bank estimates there will need to be $70 million in savings.

While cutting staff hours is one option, Citi cautions this can actually be counter productive, as it can flow through into even lower sales. No surprise Citi continues to see downside risk to earnings. To reflect this, the broker is 8% below market consensus in FY10 in terms of EPS, forecasting 28.5c in that year and 29.1c in FY09.

In contrast, Merrill Lynch’s EPS estimates are 28.7c and 29.6c respectively. ABN Amro is at 29.3c and 29.4c and the FNArena database shows consensus estimates of 28.6c and 29.4c for FY09 and FY10.

While the earnings outlook for the company is under pressure, a number of brokers continue to find things to like about the stock. Merrill Lynch views it as a one of its preferred retail plays given it offers the combination of a strong industry position, a quality management team and a strategy that should deliver solid medium-term growth.

Macquarie has gone so far as to upgrade its rating to Outperform from Neutral. The broker points out that at current levels, the shares are trading below their intrinsic valuation, as forecasts remain in line with its view of a slowing in the broader economy. Deutsche agrees the stock is a Buy, but has cut its price target to $3.50 from $4.70 to reflect the current tough conditions.

Meanwhile, UBS has cut its target to $2.40 from $4.65 on a change in methodology and the lack of any positive share price catalysts at present.

The average price target according to the FNArena database is now $3.21, down from $3.84 prior to the update on quarterly sales. The database shows three Buy ratings, five Holds and only Credit Suisse with an Underperform rating.

The broker’s negative view reflects concerns the company may not achieve its earnings guidance given the broker thinks it will be tough going in achieving sufficient cost cutting outcomes.

This morning, shares in David Jones are slightly higher in a stronger overall market and as at 11.45am the stock was up 4c at $2.49. This compares to a trading range over the past 12 months of $2.35 to $5.53.

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