Australia | Jan 22 2009
By Chris Shaw
Following a very disappointing Christmas sales period, retailer David Jones ((DJS)) has cut its earnings guidance. Management yesterday told the market net profit after tax (NPAT) growth would now be in the order of 0-5% in FY09, down from 5-10% previously.
According to ABN Amro, achieving such a profit outcome would actually be a commendable result, but one the company would struggle to maintain given the current difficult trading conditions. On the broker’s forecasts, the revised guidance may prove to be a stretch, as the company is likely to continue losing market share given its premium positioning in the market. However, Bank of America-Merrill Lynch suggests the new guidance should be achievable.
Citi sides with ABN Amro in questioning whether the group can achieve its revised guidance, as on its numbers, profits will actually fall slightly this year. The broker takes the view the company’s strong focus on cutting costs, which includes a further round of job cuts just announced, is compromising the group’s sales growth and could damage its brand for years to come.
What could also damage the brand is evidence of declining customer service. The broker suggests this is apparent from the 9.5% fall in like-for-like sales growth in the December quarter. This was a poorer result than that delivered by competitors such as Myer.
Credit Suisse also sees ongoing margin pressure as a headwind for earnings. On its numbers, the company needs to maintain gross margins at the current level of 39.5-40% as well as stripping out $70 million in costs to make current guidance.
Such an outcome will be difficult to achieve, in its view, given the deteriorating economic environment. Current conditions imply industry discounts and a volume impact given the group is positioned at a higher price level than some of its peers. As a result, gross margins are likely to fall in coming months in its view.
To reflect this, the broker is forecasting a 3% fall in net profit in the second half of this year, which puts its earnings per share (EPS) estimates at 28.4c in FY09 and 27.4c in FY10. Others in the market are broadly in line with these figures. Citi expects EPS of 28c and 27c respectively, ABN Amro is at 27.7c and 27.3c, while the FNArena database shows consensus forecasts of 27.8c in both years.
Despite the pessimistic outlook, the stock hasn’t fared too badly in recommendation terms. The FNArena database shows a total of two Buys, six Holds and one Sell, with no changes post the update to guidance.
Citi sees a Hold as reasonable, as there is valuation support at current levels and an attractive yield. ABN Amro agrees the current share price level is appropriate as it is coming from trading at a premium to the S&P/ASX200 index of around 18% in recent years, but trading at a present 7% discount.
All up, the database shows an average price target on the stock of $2.90, down from $3.00 prior to the update.
On the market today, David Jones shares are slightly weaker and as at 12.00pm the stock was down 6c at $2.44. Over the past 12 months the shares have traded in a range of $2.31 to $5.04.