Although the Myer Holdings Ltd (ASX: MYR) proposal to merge with David Jones Limited (ASX: DJS) has no chance of succeeding on the original terms, the approach has sparked interest in the valuation merits of department stores. Long derided here as the dinosaurs of retail, elsewhere offshore department stores have managed to find their own voice with some such as Nordstrom and Barneys achieving record margins and subsequent profits. Similar situations apply in the UK, Europe, Asia and Canada. Australia appears to be different. Why?
Premium overseas department stores tend to promote themselves as destinations and frequently hold exhibitions, shows or special events to draw people in – shopping is secondary. In addition many have more extensive restaurants and cafes than you see here. Not to mention excellent floor service and a depth of product range and knowledge in specialised segments. In other words, these stores carry a definite and consistent 'signature'; and you can rely on them.
By contrast our retail scene seems to be characterised by relentless sale periods in the quest to find shoppers with little emphasis on developing customers. It's a no-brainer that constant price driven promotions do nothing to generate customer loyalty.
Myer has 67 full scale stores and can be classed as a multi demographic general merchandiser. It has a limited exclusive brand portfolio and enjoys relative success with its higher margin own label offering. With a large store footprint Myer is forced to please everyone and cannot afford to become too specialised.
Although cash flows are reasonable Myer's debt to equity ratio is a high 37.4% limiting any scope for capital intensive moves.
By contrast David Jones has a low debt to equity ratio of 10.7% making it a tempting target for an acquirer. It also has a far more manageable 38 stores including a couple of concept stores focused on high margin categories such as cosmetics and fashion. David Jones carries a superior range of prestige brands and has successfully established itself as the premium fashion destination.
Another card in the David Jones pack is the potential embedded in the fully owned Sydney and Melbourne flagship properties. Plans are being drawn up for redevelopment of the Market St property in Sydney – and a number of real estate professionals have presented some potentially lucrative scenarios.
A long overdue development of own brand merchandise is now underway – David Jones only generates 5% of revenues from its own labels compared with 20% for Myer.
Foolish takeaway
A merger of David Jones and Myer would be a reflection of the Macy's Bloomingdales situation in the US, where two department store brands maintain distinct identities under the same umbrella. Although there are other factors at work, the share price of Macy's / Bloomingdales has performed strongly over the past few years, rising from $15 to $50. Macy's markets itself as 'your local department store' and Bloomingdales uses the line 'like no other store'. Sound familiar?
If David Jones / Myer can replicate the Bloomingdales / Macy's experience shareholders in both companies would benefit on the costs of doing business side. However in my view David Jones is better positioned for growth by controlling its own destiny and Myer would do better by adopting the Macy's retail model.
