Woolworths’ CEO on David Jones: ‘The worst is over’

Woolworths CEO Ian Moir has declared “the worst is over” for the retailer’s struggling Australian subsidiary David Jones that has sparked investor fury because it hasn’t lived up to expectations since it was acquired five years ago.

Since Woolworths bought David Jones in 2014 for R21.5-billion, the Australian department store chain has battled with declining sales and hefty write-downs of more than R11-billion – blighting Woolworths’ ambition to become one of the leading retailers in the southern hemisphere.

“We’ve had many bad years at David Jones and learned many lessons,” Moir told Business Maverick on 29 August, when Woolworths unveiled its results for the year to June 2019 in which group sales rose by 3.9% to R78.2-billion, but profit after tax fell by 3.7% to R4.6-billion.

“We know more about the Australian customer through fixing the David Jones business because we have collected data and research about what they want. We believe the worst is over.”

Moir’s sentiment is based on his ongoing initiatives to turn the troubled retailer’s fortunes around.

Woolworths will beef up the department chain’s online offering (David Jones’ online sales grew by 46.8% during the period under review) and shrink store space by as much as 20% by 2026 through lease negotiations.

But the grand plan is the completion of the A$200-million (about R2-billion) refurbishment of the Elizabeth Street flagship store in Sydney that will introduce exclusive and luxury clothing and beauty brands targeting affluent customers. (The A$200-million is carried by Woolworths and the property’s landlord).

The Elizabeth Street store refurbishment is expected to be completed by the end of the third quarter of 2020 – which Moir said will inject about A$42-million into David Jones’ profit line by 2021.

“The year 2021 will be a much stronger year for David Jones,” he said.

For now, David Jones is being walloped by “unprecedented economic pressures and structural changes” in Australia. Australia is said to be experiencing a recession, with the domestic economy slowing to its weakest level since the global financial crisis in 2009. Retailers are launching aggressive promotional activity to grow their share of consumer spending, which is in the doldrums due to slow wage growth and rising indebtedness.

David Jones has succumbed to these market pressures as the department chain saw sales fall by 0.8% during Woolworths’ reporting period. The gross profit margin – a key metric for profitability in retail – was 1.1% lower.

Market pressures also resulted in Woolworths writing down the value of David Jones by more than R11-billion: first in January 2018 by R7-billion and a further A$437.4-million (R4.3-billion) on 1 August 2019.

Moir going Down Under

Under pressure from Woolworths shareholders – some of whom have called for him to be fired because of the slow David Jones turnaround – Moir has decided to move to Australia from Woolworths’ headquarters in Cape Town.

Moir’s Woolworths group CEO duties will continue but he will oversee the turnaround of David Jones from Sydney because he “knows the market well”. Moir, a Scotsman, was the former CEO of Australia-based retailer Country Road Group – which is owned by Woolworths.

Moir’s move to Australia was sparked by boardroom drama at David Jones when the retailer’s CEO, David Thomas, resigned with immediate effect in February 2019 – becoming the fourth CEO at David Jones to resign in five years.

Despite shareholder calls for Woolworths to sell David Jones, Moir has ruled it out as a possibility.

“We have spent a lot of money to transform the business. We are pretty much at the last leg of the race,” he said.

But market watchers are not convinced. Damon Buss, an equity analyst at Electus Fund Managers, said he’s concerned that all of management’s attention is on the Elizabeth Street store, which he doubts will deliver a return on capital above the capital spent (A$200-million) – while the other 46 David Jones stores are probably being neglected.

“Given the state of the business, the outlook for department stores and concerns around the macro environment in Australia, if Woolworths did try to sell David Jones, we do not think they would get close to the $965-million (R14.7-billion) book value if they could find a buyer.”

Buss added that while Woolworths is stuck with David Jones, it will continue to drag down Woolworths’ performance for the foreseeable future.

Reuben Beelders, chief investment officer at Gryphon Asset Management, is also concerned about Australia’s tough economy as “with a downturn in the economy, consumers trade down and competition increases”.

Beyond the general state of the economy, Beelders is also concerned about the reduction in David Jones’ store space and the Elizabeth Street store, which might only normalise trading by the fourth quarter of 2020.

Despite Woolworths’ food business remaining resilient, and the clothing and beauty business returning to sales growth, Beelders and Buss don’t favour retail stocks, given South Africa’s tough economy that weighs on consumer spending. BM