Australia's second-biggest department store First-Half Profit Rises 30% on Clothing

David Jones Ltd., Australia's second-biggest department store, said first-half profit rose 30 percent on Christmas demand for clothing and cosmetics.

Net income rose to A$71.1 million ($57 million), or 15 cents a share, in the six months ended Jan. 27, from A$54.5 million, or 12 cents, a year earlier, Sydney-based David Jones said in a statement today. The result matched the company's Jan. 16 forecast.

Chief Executive Officer Mark McInnes, who raised profit forecasts three times in the past year, opens his first new store in four years next month as he takes over a Sydney outlet from larger rival Myer Pty. David Jones is increasing profit margins as Myer reduces discounting after being sold to buyout firm Texas Pacific Group last year for A$1.4 billion.

``They have been able to extract better selling prices because of the lack of competition from Myer,'' said Tony Pearce, who helps manage the equivalent of $3 billion of Australian equities at Legg Mason Asset Management in Melbourne. ``It is really a two-horse race in the department store field and that will continue to help David Jones.''

David Jones shares fell 3 cents, or 0.7 percent, to A$4.45 at the 4:10 p.m. close of trading in Sydney. The stock is the best performing retailer in the benchmark S&P/ASX 200 index since McInnes took the job in February 2003.

Store Buyback

The company also made a one-time profit of A$99.3 million from the unwinding of a sale and leaseback agreement for its Sydney stores. David Jones bought the stores back in September.

McInnes reiterated his forecast for second-half earnings to increase between 8.5 percent and 13.5 percent. In the same period last year, David Jones' profit before items totaled A$26.6 million.

Department store sales for the first half rose 7.6 percent to A$1.04 billion. Sales for the first seven weeks of the third quarter have been ``broadly in line'' with the 8.9 percent gain of the second quarter.

``Although we have had an encouraging start to the winter season, we are a trading business and as such we prefer to trade through a significant part of the second half before updating our existing guidance,'' McInnes, 41, said in the statement.

Department store earnings before interest and tax rose 44 percent to A$93.3 million in the half as McInnes further reduced the company's cost of doing business and attracted sales from more affluent customers.

Improving Margin

By cutting expenses and reducing his inventory holdings, McInnes increased the company's margin, which measures EBIT as a percentage of sales, to 9 percent in the half from 6.7 percent a year earlier.

``If you go back a few years, it would have been beyond anyone's wildest imagination that you would see department store margins of 9 percent,'' Legg Mason's Pearce said.

Earnings from the financial services unit, which includes an in-store credit card, rose 6.1 percent to A$17.3 million.

The company plans an ``alliance'' with a bank or other lenders to start a David Jones-branded general purpose credit card, which McInnes may release next year.

By 2008, David Jones plans to add new stores in malls at Chermside in Queensland state and Doncaster in Victoria.

Texas Pacific bought Myer in June from Coles Group Ltd., Australia's second-biggest retailer.

Myer said March 16 it would open four new stores, extending its chain to 62 outlets compared with 37 for David Jones.

McInnes plans to increase David Jones' focus on international fashion labels as Myer reduces discounts and stocks more so-called private brands, which are exclusive and not subject to price comparisons with other retailers.

``They've been making decisions for their shareholders about maximizing their margins and minimizing their costs,'' McInnes said on a conference call. ``They are restructuring themselves as a low-cost private label department store.''

David Jones will pay a first-half dividend of 9 cents a share, up from 7 cents a year earlier.

source:www.bloomberg.com