David Jones

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ASB INVESTMENT RESEARCH
Prepared by: Marc Hemsin – 3386122 Juthakarn Jessica Suwanasilp – 3344346 Tu Lan – 3282178 Bo Qiu - 3308317

DAVID JONES - BUSINESS ANALYSIS AND VALUATION
May 2012

ASB INVESTMENT RESEARCH
T A B L E O F CONTENT

1. EXECUTIVE SUMMARY 2. DAVID JONES’ PROSPECT AND THE RETAIL INDUSTRY 2.1 INDUSTRY ANALYSIS 2.2 COMPANY ANALYSIS 3. ACCOUNTING AND FINANCIAL ANALYSIS 3.1 ACCOUNTING ANALYSIS 3.2 FINANCIAL ANALYSIS 4. FORECAST AND VALUATIONS 4.1 FORECAST ASSUMPTIONS 4.2 COST OF CAPITAL – WACC 4.3 VALUE OF DAVID JONES 5. CONCLUSION 6. REFERENCES AND APPENDIX

ASB INVESTMENT RESEARCH
1. EXECUTIVE SUMMARY

DAVID JONES LIMITED - DJS
Recommendation

Valuation $2.20 Last Price $2.25

52 Week Range 4.35 - 2.16 Market Cap $1,216 M

Industry group Retail Business risk High

HOLD

David Jones is a leading upmarket retail department store with 37 stores throughout Australia and specialises in high end brands of clothing, cosmetics and homewares. It’s only major competitor, Myer, has strengthened its position in the retail industry and has kept pressure on David Jones. David Jones’ competitive strategy relies on its product differentiation through exclusive brand names supply arrangement, customer loyalty and reputation. However, the company and the retail industry are currently suffering and will remain in future years from online

Strong Buy

Buy $1.85

Hold $2.75

Sell $3.10

Strong Sell

$1.70

competition, a decline in consumer sentiment and poor economic conditions. In addition, the expiry of the contract with American Express credit cards in FY14 is forecasted to cause a severe fall to its earnings. Consequently, David Jones would have to prepare for the difficult conditions ahead by focusing on cost-cutting and investing capital in alternative shopping channel such as the web-store. The financial analysis reveals that David Jones has marginally become less liquid and less working capital efficient since inventory turnover has decreased and would have difficulties paying their debts in future assuming the weak retail condition continues. Although Myer’s sales figures are greater, David Jones has been the better performer with respect to Net Profit Margin, indicating that they are more cost efficient. The accounting analysis reveals similarities between David Jones and Myer’s accounting policies but no concrete evidence of earning manipulation from management. Our valuation estimates David Jones’ intrinsic value at $2.20. A negative sales growth is forecasted in the assumptions to reflect the challenging prospects of the retail industry. As of the 30th of May, the current price of David Jones closed at $2.25. ASB Investment Research recommends a HOLD position for this share price.

ASB INVESTMENT RESEARCH
2. DAVID JONES’ PROSPECT AND THE RETAIL INDUSTRY
2.1 I N D U S T R Y A N A L Y S I S
The retail industry has not been a shining light of the Australian economy over the past few years as it faces some of the worst trading conditions in 50 years (Hutton, 2012). As shown from the graph below, department stores, the clothing section and the footwear section have been suffering a decline of 6% since FY09 in contrast to steady growth in volume across the remaining retail industries (Bald, 2012). According to the Australian Bureau of Statistics, February retail trade figures showed department stores experienced a year-on-year decrease of 2.8% while the clothing and retail sector took a 2% drop and even household goods declined by 0.5% (ABS, Retail Figures, 2012). The following Porter’s Five Forces model highlights the current competitive intensity and the attractiveness of the department store retail industry. Existing competitors such as Myer and growth of online retail from overseas

Products can be found in other cheaper stores and online

Competitive Rivalry

Moderate Threat of Entrants

Threat of Substitutes Very High Industry Attractiveness

First mover...
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