This retailer has a margin problem

You'll never guess which posh Australian retailer has a big margin problem.

Catherine Baab-Muguira

Catherine Baab-Muguira is a Fool.com.au analyst/writer. A Fool since 2010, she comes at investing by way of being a compulsive reader and has a keen eye for detail from years of working as a freelance journalist. In 2012, she joined the Motley Fool's Analyst Development Program to pursue her love of investing full time, and worked as an analyst on one of The Motley Fool’s US services before heading down to Australia. A graduate of the University of South Carolina and the University of Auckland, she has lived and worked all over the world, including year-long stints in Singapore and New Zealand. Hence her great love for nyonya laksa and the All Blacks. We’ll forgive her that last one!

Published August 14, 2013 1:00 pm AEST

The retail business is all about margins. Investors expect low margins from supermarket retailers like Woolworths (ASX: WOW), but they expect fat margins from posh retailers like David Jones (ASX: DJS).

That's why it's so striking that David Jones' margins lag some its considerably less-posh competitors. Here's a look at the problem.

Outperformed by Myer, Premier Investments and even Billabong

For instance, competing department store Myer (ASX: MYR) has expanded its gross margins by nearly 5 percentage points since 2008 – though net margins have shrunk over this same period. David Jones' gross margins have barely budged over this same period, and its net margins are still lower than Myer's today.

As another point of comparison, Premier Investments (ASX: PMV) enjoys much higher gross and net margins than those of David Jones, despite the company's concentration in "fast fashion" and accompanying low price points in many of its stores. Even Billabong's (ASX: BBG) gross margins are 10 percentage points higher.

But there's a silver lining to this cloud

The good news is, David Jones' management finally seems interested in addressing the problem. Just this week, the company announced a deal that will see Dick Smith take over its in-store and online electronics business. As a result of the deal, David Jones will earn a fixed percentage of sales – not profits, thankfully, given the notoriously tough consumer-electronics business – while Dick Smith assumes the risks in running the business.

And further, as The Australian Financial Review reported today, "David Jones will reduce its exposure to low-margin categories such as whitegoods, travel goods and stationery by refurbishing and shrinking new stores rather than outsourcing departments."

The bottom line for Foolish investors

Between the Dick Smith deal and these other initiatives, David Jones may be able to improve its margins and overall profitability in the next several years. There's certainly room enough for improvement.

That's not to say that David Jones shares are a buy today. In fact, at The Motley Fool, we've got what we believe is a much better idea. You can get all the details now, for FREE, by clicking this link. Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

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Motley Fool writer/analyst Catherine Baab-Muguira owns no shares in any company mentioned in this article.

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