If Macrobusiness readers are less than surprised by the downgrade of David Jones, the same cannot be said for the broking community. In their usual stampede to discover the self evident after the fact, they are turning very bearish. Sentiment, accordingly, is likely to turn ugly for the stock.
Morgan Stanley says that there is more than consumer weakness in the downgrade:
We remain Underweight. DJS is only beginning to feel the impact of Internet retailing; as this force increases, we expect its record margins to continue to erode. We cut our price target from A$3.60 to A$3.20.
DJS’ large profit warning is more than just a weak consumer, in our view: We also cite the impact of the Australian consumer switching to shopping online. DJS is poorly placed to compete with online retailers – it has a high relative cost structure and margins, plus a weak online offering. Until it addresses this issue, we think the stock will continue to trade on 10-11x one-year forward EPS.
Royal Bank of Scotland has a sell:
When David Jones commenced its winter clearance two weeks ahead of Myer this May, it was clearly reacting to an expanding inventory position. It appears the open-to-buy has been managed to meet short-term guidance targets rather than adapting to macro conditions and potential structural changes in demand – something uncharacteristic for the business.
Deutsche Bank downgraded from buy to hold and slashed its price target from $5 to $3.55. Didn’t see that one coming:
Trading conditions deteriorated so rapidly through June & July that the comp sales decline in 4Q will likely be as sharp as it was at the peak of the GFC. While the company has a solid track record of delivering robust bottom line performance through very difficult conditions, we suspect management is running out of cost levers to pull, evidenced by the expected decline in NPAT through 2H11 & 1H12. We continue to believe the long term prospects remain attractive, however.
Credit Suisse suggests the sell off may be putting the stock into territory where it represents fair value, so it only has a neutral recommendation:
Investment case: a stable business with a poor macro outlook. The decline in June trading is reflective of a sharp retraction in consumer confidence during the month. There is little basis for extrapolating DJS’ performance beyond an anticipated period of macroeconomic weakness. DJS is likely to show equally strong positive leverage to an increase in sales. DJS has virtually no debt and a high rate of cash conversion.
■ Catalysts: There is little reason to believe that consumer spending will turn more positive in the near term and we are not confident that there will be much movement in DJS’ share price until that time occurs. As such, DJS remains mainly a value opportunity requiring a longer-term view.
■ Valuation: DJS is fair value at around $4.00 per share. A bear case (minus 2ppt reduction in gross margin) reduces our valuation to $3.50 per share and would require a sustained increase in competition to come to fruition. Our target price of $4.00 per share is based on an average of our SOP valuation of $3.95 per share and DCF valuation of $4.05 per share.
The grim consumer confidence numbers coming out hardly lead to any confidence in the stock. As H&H suggests, a trade between retail and mining probably wouldn’t be such a bad thing. And even if there is an interest rate cut to boost the retail sector, there is no guarantee David Jones would be a strong beneficiary.