bluebird, think this is why they decided to go into a trading...

bluebird, think this is why they decided to go into a trading halt.

David Jones is preparing to confirm market fears of a 50 per cent drop in future credit card earnings before next year’s expiry of the first stage of its 10-year alliance with Amex.

The group is expected to announce that credit card earnings in the new agreement could fall to between $24 million and $27 million a year – half the $51 million likely this year.

Financial services account for 20?per cent of group earnings and a $24 million-plus drop in credit card earnings will have a substantial impact after 2013.

The company will unveil strategies aimed at boosting profits with new services and stores this week.

Earnings from DJs’ general purpose credit card and store card business have risen 7.5 per cent a year over the past four years under an agreement with American Express, augmenting earnings growth from department stores.

The first stage of the 10-year alliance with Amex is due to expire at the end of 2013 and the deal will revert to a profit share agreement from 2014.

“We’re keen to get a better understanding of profitability in financial services that now make up 20 per cent of earnings,” Aberdeen Asset Management’s head of equities, Robert Penaloza, said.

“This is quite a unique agreement from what we understand and nobody else seems to have cut the same type of deal,” he said.

DJs’ chief executive Paul Zahra hopes to counter the drop in credit card income by lifting profits from the core store business. He will unveil his blueprint at a long-awaited investor update on Wednesday.

The present strategic plan, signed off by former chief Mark McInnes in March 2008, has proved to be too optimistic. DJs was aiming to lift net profit by 5 to 10 per cent through the retail cycle by cutting costs and lifting gross margins.

Net profit rose 14.1 per cent in 2009 and 9.2 per cent in 2010 but slipped 1.5 per cent in 2011 and is expected to fall almost 20 per cent in the first half this year and 17 per cent for the full year. It has beaten its cost-cut targets but brokers believe it has cut costs too aggressively to achieve targets and is now paying the price.

The group slashed advertising and promotion from 4 per cent of sales in 2005 to less than 2 per cent in 2011 and cut non-management staff from 16.3 per cent of sales in 2005 to 14.3 per cent of sales in 2011.

The aggressive staff cost-cutting has led to poor service which has compounded the downturn in discretionary spending and forced more frequent and heavier discounts.

The discounting, in turn, has hurt gross margins, which fell to 39.1 per cent in 2011 and are expected to slip to 38.2 per cent this year, JPMorgan says, falling short of the company’s 39.5 to 40 per cent target range.

“David Jones has performed well over the years, largely from cost cuts, and it seems almost all of the hanging fruit has been picked,” Investors Mutual fund manager Julian Beaumont said.

Mr Zahra’s strategic plan is unlikely to be as detailed as previously and may not include specific sales and profit growth targets. But he is expected to detail the aim to be a fully integrated, multi-channel outlet capable of generating online sales of 5 to 10 per cent of total revenue.

Also expected is an announcement of a substantial investment in staff hours and technology to improve service levels, new customer services and categories aimed at boosting foot traffic and conversion rates, and the result of pricing talks with ­suppliers.

The Australian Financial Review 19.3.12