Downgrading the crashed

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.

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    • The_Mainlander

      To be honest that was the most inept PR Spin I have seen in quite sometime.

      Just awful really – fire that PR agency and onvest in a decent marketing strategist and re-position their lines for the dive to come!

      Eeek DJ may have to re-invent themselves as a Bi-Lo!

      LMAO – sorry but they will be under sruous presure now… as for the dumb money that bought into Myer!



  1. Crikeys, MSM – it’s disleveraging, having maxxed out affordable debt.

    This is just the continuation a trend that now entering medium-term duration…

    • Yeah Stewart, it kind of reminds me of that scene in the Castle

      “In summing up, it’s the Constitution, it’s Mabo, it’s justice, it’s law, it’s the vibe, and, uh … No, that’s it. It’s the vibe”

  2. In part DJS just shows how spooked people are. And there are plenty of scary things happening wherever you look.

    As well, DJS offer consumers a discretionary spending menu. They are not dealing in staples, for the most part. Suddenly, it is cool to not spend, but to pay down the Platinum Card, and save a bit if you can.

    It is as we have been saying all along – restraint is the new black. And consumers are on board with that. They seem to like frugal.

    Can you buy DJS? Not until you can see where their trading is heading. It will take at least until September to assess this….(imo)….

  3. Putting aside short-term fluctuations, in the long-term DJS might outperform. It’s currently got a P?E ratio of less than 10 and, since 2006, has managed to report ROE above 20%. Prince, maybe you could do another Equity Spotlight on these guys, please?

    • I’m in no way qualified to comment, I havent looked at their financials in years, but i know for a long time their store card was bringing in a large chunk of their profits. I worked there when at uni and they were pushing those things to everyone. As an economics student i took interest in their financial statements and it was their store card driving profits. Now i think its been replaced with an AMEX, which i’m sure has even higher margins. Anyway, with all this deleveraging, i cant see this being a major profit driver anymore.

      • Yeah yeah, a posh Hardly Normal…we get it.

        I’m sorry Steve if I seem abrupt. It’s the logo/pic/avatar/whatever that Mr Editor has there. He may well be the coolest man in the world.

        I don’t think we’re worthy to reply.

  4. Putting aside short-term fluctuations, in the long-term DJS might outperform. It’s currently got a P/E ratio of less than 10 and, since 2006, has managed to report ROE above 20%. Prince, maybe you could do another Equity Spotlight on these guys, please?

  5. …”plus a weak online offering”

    Damn right they do – basically none! What century are these guys living in?

    I’m a PM on Canada’s two largest ecommerce sites (HomeDepot and Sears) and if they can offer products online (which brings in a significant % of revenue) then what the hell are these guys doing? Their website looks like a dogs breakfast…fail

  6. David Jones in Perth is working the problem out by reducing staff hours and cutting days from the roster.
    Everyone is affected the staff unhappy(well murderous could be a better word), the in-store customers even more frustrated at not being able to find assistance.
    I think a lot will probably leave – I will. Then there’s the problem of actually getting paid when you do – sigh.
    Advice, JUST DON’T SHOP THERE IN STORE OR ONLINE, and dont buy into their goshdern cards.