For the past two months our eyes and ears have been full of stories about David Jones (DJS) or Myer (MYR), the tweedledum and tweedledee of Australian department store retailing.
Much of the stuff has been about affairs on the David Jones board and the way it treated the nil premium merger suggested by Myer late last October.
There’s been an assumption in many of the stories, that David Jones and Myer are the only two department store chains in the game.
But experienced retailers and investors know that’s a crock of rubbish, there are three more – Target, BigW and Kmart.
This trio are not considered to be in the same class as David Jones and Myer – they don’t have fashionable clothing and other fashion labels, nor do they have luxurious fittings or high end perfumes or food.
Call it media snobbery, call it media blindness, but the trio are competitors (along with other smaller chains such as The Reject Shop (TRS), Best and Less), for David Jones and Myer – they have the capacity to take sales from Myer and Djs and are doing that to varying degrees of success.
BigW is a moderate performer for owners Woolworths (WOW) at the moment, while Target is a recovering basket case for Wesfarmers (WES).
Standing head and shoulders above Myer and David Jones is Kmart, is the clear sector leader.
In fact Kmart remains king of the department stores, no matter its core demographic or price points or stock range and type.
It’s Wesfarmers’ downmarket department store has retail and investment metrics which blow the socks off David Jones and Myer.
Kmart chain recorded earnings before interest and tax (EBIT) growth of 5.7%, to $260 million for the first half of 2013-14.
David Jones retail EBIT rose 8.3% to $91.6 million, but Myer saw a 10% fall in its EBIT to $126.6 million.
That means Kmart earned more than David Jones and Myer did, combined.
But its sales only rose 1.7% to $2.3 billion. Myer’s sales rose 0.3% to $1.7 billion and David Jones lifted sales 3.8% to $1.04 billion.
David Jones and Myer both lifted their like for like or comparable store sales by 1.1% and 1.2% respectively, which was faster than topline growth, and a solid sign for both chains.
Myer and David Jones had combined sales of $2.7 billion, but their combined EBITs of $218 million was well short of Kmart’s $260 million.
And why? Well, look at their retail EBITs (earnings before interest and tax), the best measure of retail profitability, and with comparable store sales, a very solid measure on continuing retail performance.
Kmart’s comparable store sales growth was just 0.3%, down from 3.0% in the previous corresponding half year. In other words, Kmart lagged its rivals.
But Kmart ran its business in a far more efficient and profitable way because its retail profitability was far superior to that of David Jones.
The only explanation for that is Kmart used its assets more efficiently, controlled costs and used those gains to fatten its profit margins. It helps renting space in shopping centres, rather than owning real estate (although those holdings are big assets for David Jones and Myer).
But Kmart has been able to leverage its rental position into a negotiating chip with landlords, so the outgoings are not as big a cost as it would seem.
That has helped improve Kmart’s EBIT margin which was 11.2% (that is, 11.2 cents in every dollar of sales) in the first half of 2013-14, up 0.5% on the same period of last year.
Myer’s EBIT margin fell to 7.29% from 8.17%, which was a big fall.
And David Jones EBIT margin rose to 8.7% from 8.4% in the first half of 2012-13, which told us the chain was pulling itself back on track.
But Myer and David Jones are supposed to be ‘upmarket’ retailers and chains in this part of retailing are supposed to have fatter margins than the likes of Kmart.
But Myer and David Jones don’t – Kmart does.
And finally, Kmart had a return on capital of nearly 27% in the latest half year, which is pretty solid.
Myer and David Jones have different measures – returns on equity which include retained earnings and cash. Kmart’s cash and retained earnings were not broken out.
But that figure of 26.8% gives us a glimpse of how well it is performing, especially compared to the more high profile David Jones and Myer.
The bottom line from this comparison is that David Jones and Myer spend too much time worrying about each other and not looking wider afield for ideas about lifting returns for their long suffering shareholders.
Kmart’s out peformance also provides a useful comparison for the now increasingly silly merger idea for David Jones and Myer – the gains both chains desire are to be found internally, not from merging and cutting the heart out of the loser in the deal (which Myer thinks would be David Jones).
Management and staff motivation also play huge roles a in explaining Kmart’s superior returns. That is what has been lacking at Myer and David Jones.
