Read this after purchasing. DJS could go significantly lower. Upmarket department store group David Jones has fewer blemishes than mid-market rival Myer. The company?s debt levels are negligible, it owns property worth $380m (its flagship Sydney and Melbourne stores), and its store rollout is more measured.
If you must own a discretionary retailer?and we?re not saying you should?David Jones is the ?least worst? alternative. Its superior margins and conservative financial position mean it?s more likely to survive a retail shakeout than weaker competitors.
Nevertheless, it?s subject to the same retail environment and online threats as Myer. Just yesterday David Jones reported a significant profit downgrade?2012 first half profit is likely to fall 15%-20%?and management described current trading conditions as ?unprecedented?.
We?ve long been concerned a retail downturn was looming, and on 20 Dec 10 when the price was $4.52, ceased coverage on what was then a very overpriced stock. Since 22 Sep 10 (Sell ? $5.10), the stock has fallen 37%.
It may yet get worse. Margins have risen strongly since the dark days of 2002. If EBIT margins fell to 8% (higher than Myer?s due to David Jones? financial services business), DJs would generate a net profit of $110m. Applying a PER of 10-12, which would reflect its more conservative financial position, a price between $2.00 and $2.50 may attract our attention. AVOID.
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