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The Covid-19 overlay on 2020 with Jobkeeper, rent concessions, and online purchasing has made it difficult to precisely assess both chains’ trading performance, but the signs are hardly inspiring.
Woolworths, the multi-brand South African retailer, bought David Jones for $2.1 billion in 2014, and its value is now possibly about $334 million after writedowns and the sale of $630 million in properties.
Myer floated on the Australian Securities Exchange in 2009 with a market capitalisation of $2.4 billion but is currently valued at just $250.4 million.
Effectively, today you potentially could buy both chains for $1 billion or less, about a quarter of their combined high watermark valuations.
A merger could, of course, attract some gaming of a deal that would boost the price, but investors are hardly bullish on department stores, as evidenced by the tepid interest in the Best & Less float proposal.
The profitability of both chains is now dependent on store closures, the reduction of floor space and revised lease deals with landlords, and continued growth in online sales, maybe retreating post-Covid based on market advice from pureplay e-tailer Kogan.com.
Woolworths property sales have been applied to reducing David Jones debt but have not recouped any of the 2014 outlay for the store.
The retailer reported sales momentum in pre-Christmas trading, in part, driven by Black Friday and Cyber Monday events. Still, investors in South Africa have been growing restless with David Jones cumulative losses of about $1.4 billion in the past three years.
Roy Bagattini, the Woolworths CEO, has not ruled out the possibility of the company divesting David Jones despite attempting a turnaround strategy.
The $56 million operating profit for the first half of the current financial year followed a 15 per cent reduction in costs, which included the rent reductions and floorspace sacrifice, as well as government support.
As part of the turnaround plan, Woolworths has announced the closure of its department store in Wellington, New Zealand, following an announcement last September that it intended to close up to 10 stores in Australia and New Zealand within the next two years.
The retailer has also retreated from its plan to drive foot traffic and sales through an upmarket food offer in stand-alone stores and has terminated a co-location food concept selling fresh and packaged food in 35 BP service stations.
Myer has kept out of the headlines in the past year but continues to struggle, and in the first half of the current financial year, achieved online sales growth of 71 per cent.
Myer’s net profit of $42.9 million for the half-year relied on cost reductions that included lower inventory levels, $51 million in government support through Jobkeeper and $18 million in rent and outgoings waivers from landlords.
As part of a 10 per cent reduction in floorspace across its network, Myer will close its Knox City store in Melbourne’s eastern suburbs in July, a store that was and arguably today still fits the socio-demographic profile the brand targets.
The retailer has reduced its floor space in stores in Cairns, Belconnen, Highpoint in Victoria and Morley in West Australia, as it strives to cut costs as sales continue to decline.
The forward plan anticipates a 110-square-metre-reduction in gross leaseable area for a shrinking Myer that, in the last half, achieved 21 per cent of its total sales online but with impacts on margin taking into account competitive pricing, logistics and the higher rate of returns compared to in-store purchases.
In September last year, major Myer shareholder Solomon Lew declared that the retailer was headed for administration. It is doubtful that he is optimistic about the future of the department store he commanded as chairman in better days.
Trading results for the current half, less impacted by Covid-19 but also without the government support and deep landlord concessions on rent, could well force what some pundits believe is an overdue and crucial merger.
Given the parlous enterprise values for Myer and David Jones and the heavy pruning of underperforming stores completed or planned, the other possibility is the emergence of new owners, potentially even Lew.
A merger or new owners would undoubtedly entail additional store network consolidation and would have significant implications for staff, landlords and suppliers, especially Australian fashion designers.
However, key investors and landlords believe reinvention of the department store chains is unlikely to ensure their survival as separate entities and decision time is nigh.