Is Flat The New Growth For David Jones?

This story features MYER HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: MYR

By Chris Shaw

David Jones ((DJS)) reported a 1.4% increase in March quarter sales, a result the market viewed as a soft one given it reflected only weak growth relative to the 10% decline in sales recorded in the corresponding quarter last year.

As Deutsche Bank points out, the March quarter sales result means, in dollar terms, group sales were only marginally above the result from the same quarter in 2006. In the broker's view this highlights just how tough retail conditions are at present.

The implication is the June quarter will also be a difficult period as David Jones will have to cycle tougher numbers and higher interest rates. Deutsche Bank notes in the June quarter last year sales recovered from the 10% fall in the March quarter to a decline of only 1.2% on a tailwind of government stimulus hand-outs.

Credit Suisse takes the view the tough June quarter conditions outlook is more a function of cycling more difficult numbers and doesn't reflect a persistent slowing in consumer demand growth. There is some evidence to support this view as the broker notes categories such as furniture and menswear, which traditionally are hit early in any slowdown, are still showing solid demand.

As well Credit Suisse notes the Australian employment environment continues to improve, while consumer confidence has to date remained solid despite the increases in interest rates.

One attraction for GSJB Were is the company continues to refurbish its existing stores and has some new stores planned, which it suggests will deliver good sales growth over the medium-term. As well, the cost programs put in place by management remain on track, which should become more apparent when sales growth rates begin to accelerate. This is expected to be in the second half of 2010.

There is some scope for earnings disappointment in FY11 in the view of JP Morgan however, given it will be cost savings and not actual sales growth that will drive earnings over the next year. This implies little chance to deliver a positive earnings surprise to the market for the next 12 months or so.

Post the sales result, GSJB Were is forecasting EPS of 34.4c for FY10 and 38c in FY11. These estimates are unchanged post the third quarter sales result given management reiterated full year earnings guidance. Credit Suisse is a little less aggressive in forecasting EPS of 33.6c and 36.4c in FY10 and FY11, while Citi is at 32.8c and 35c respectively with its numbers.

Consensus forecasts according to the FNArena database stand at 33.4c this year and 35.9c in FY11, while Deutsche Bank is a little below this at 33c and 35c respectively. The issue for Deutsche Bank is this implies only modest growth in earnings for David Jones, which gives little reason to be aggressive towards buying the stock.

Deutsche Bank suggests with the retail space likely to experience tough conditions for some time, and earnings growths for David Jones in the short-term will come primarily from further cost outs. At the same time there are companies in the sector with specific earnings drivers such as new stores for Myer ((MYR)), category growth for JB Hi-Fi ((JBH)) and geographic expansion for Billabong ((BBG)).

In the view of Deutsche Bank this means there are more attractive plays in the sector at present as other companies offer more than the simple cyclical exposure of David Jones, where flat is the new growth outlook for the shorter-term at least.

Value is also more apparent elsewhere, as Deutsche Bank's numbers imply Myer is currently trading at a 24% relative discount on FY11 forecasts. Given this the broker rates David Jones as a Hold.

Citi agrees and also has a Hold rating, reflecting its caution on the sales outlook given its view the fiscal stimulus hurdles to be cycled in the June quarter may be bigger than David Jones currently anticipates. The broker does suggest if the share price was to drop below $4.25 it would be an opportunity to acquire the stock.

GSJB were also prefers Myer in the sector but sees enough value in David Jones to justify a Buy rating, particularly since the stock has recently experienced an earnings multiple de-rating. Post the sales result Credit Suisse has upgraded David Jones to Outperform from Neutral, suggesting while some patience may be needed given a likely weak June quarter sales result recent share price weakness has improved the value equation.

Macquarie has upgraded from Underperform to Neutral, noting recent share price weakness which has factored in the weaker outlook.

This comes despite some trimming of earnings estimates post the sales result, which resulted in Credit Suisse dropping its price target by 20c to $5.30. UBS has followed suit and cut its target by 70c to $4.45 while the average price target according to the FNArena database now stands at $5.24, down from $5.34. The database shows David Jones is rated as Buy five times and Hold five times.

Shares in David Jones today are slightly higher, trading up 1c at $4.30 as at 10.55am. This compares to a trading range over the past 12 months of $3.45 to $5.96 and implies better than 18% upside from current levels.

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