Business Plan of David Jones Limited - Case Study Example

Name: XXX Tutor: XXX Title: David Jones Limited Five Year Performance Report Institution: XXX Date of Submission: XXX Introduction David Jones Limited (DJS) is a leading up market retailer with stores throughout Australia. The group operates 35 department stores and 2 warehouse outlets. The business was first establish in 1838 by a welsh businessman, it is famous for its branding, a black-on-white hounds-tooth which is currently is a recognized corporate business in Australia. David Jones is believed to be Australia’s favorite upscale and elite departmental store (Capiński and Wiktor , 2008, pp. 75). It is believed to be the oldest departmental store in the world that still trade under its original name. In 2005, the company business strategic review was tested in challenging retail environment. The business report delivered an outstanding financial performance. The DJS financial reports reflect these achievements via the business comprehensive statement, statement of financial position and cash flow statement. The business main operating activities over the period from 2005 for a consolidated entity of DJS limited dwell on retailing through departmental stores and providing customers’ credit through the DJS business card. These activities in 2005 are reported to have contributed an estimated $77.862 millions profit after income tax of $ 33.854 millions. David Jones Limited Economic outlook for the five years 2005-2010 When comparing the five years performance in the market, it shows a significant increased of 19% on profit after tax for the entire period. This can be accounted according to the strong business implemented by the company (Meitner, 2006, pp. 28). For instance, the cost efficiency program, tighter inventory management, rigorous management of the capital expenditure and strong credit cards business are among the operational activity that has highly boosted the firms performance over the period. This is an improved performance when compared to other previous business reports which anticipate that the firm recovery from the recession experiences a slower pace compared to that witnessed that witnessed in 1970s, 1980s and 1990s. This is contrary to the reports released claiming improved recovery has been stronger when compared to the original forecast. With much contest on the annual reports, there are likely rate of error in the assumptions and forecast. The uncertainty surrounding their forecasts, the reality is that there have been forecast errors (Howard, 2007, pp. 112). Departmental Stores For departmental stores, clothing represents a significant proportion of total sales. Australia’s highly concentrated department store sector is dominated by two national firms operating in mainstream markets and two national firms competing in the discount sector. At the high end of the Australian market David Jones Limited and Myer stores have competed for supremacy in fashion oriented clothing markets. Both businesses have sought to attract local fashion designers’ to exclusive store within store concessions. On the contrary, David Jones’s pioneered decision to favor edgy Australian and New Zealand designers have been positioned the business the clear leader. The store offers multiple price points. The David Jones’s most resent innovation is introduction of cheapest diffusion versions of Australian designs. It appears that in department stores environment, local designers have been able to compete successfully against high- profile imported designers brands. In addition the competition between high end department stores has generated positive spin-offs across the industry through increased interest in fashion. This according to the business report s over the last years ending June 2010 reveals an improved position of department stores relative to specialty retailers when considering both sales and fashion status. The pace of David Jones Limited economy recovery Clothing Markets Understanding the structure of Australia’s clothing industry present a critical test, considering one has to understanding the characteristics of its clothing markets. Like other western market the Australian market is highly segmented not only according to the income related strata, but also in the segments defined by combinations of gender, age, body type and aesthetic preferences. These break the market up into multiple small national markets defined by style preferences. The Australian casual lifestyle and moderate climate leads Australians to spend less on clothing than people in otherwise comparable western economies. In the period 2006 – 2009 the retail store turnover was estimated to have been AUD $ 10.1 billion suggesting that after additional clothing sale retail stores was estimated tat $ 14 billon spend on clothing each year. Moreover, the Australian market is spread across land area of about 30 times larger when compared to that of United Kingdom. Comparing by national standards, the Australian market is thin indeed. This context militates against development of strong national markets in any but most popular lifestyle segments. Clothing Retailers In June 2001, the Australia’s 10,673 clothing retailing establishments were distributed across the nation in a rough proportion based on the population densities. The structure of this Australian garment retail sector reflects its historical development. In order to remain consistent with other overseas trends in retail management the retailers also increased their investments in brand identity and customer loyalty. More firms particularly David Jones Limited have become involved in micro-managing subcontracted production in ensuring garments reflected becomes exactly the material form of retail brand identities. Changes to the scope have particularly help David Jones Limited business to track sales more accurately, in managing their supply and distribution chains, reduce inventories and limit stock mark-downs. The retail stores have also benefited from firm consolidation and centralize their warehousing functions. The firms’ economy has grown more strongly for period 2006 - 2010 than was forecast to a period ending June 2010. The Australian GDP has for the identified years reported to have improved with a 0.8% above the forecast expected level. The reason behind this is that firms are rebuilding stocks to pre-recession level. The recovery rate after the past war recessions has always exceeded 3%. Consumer Spending Forecasts for consumer spending have been increased all through the period, it is expected that this will increase to a better heights in the coming financial years. Consumers bring their expenditure more especially on VAT increase on from 17.5% to 20% by 2011. E-tailing is on strategy that over the years that has build consumers through use of social networking sites. Increased interest penetration combined with growing preference of consumers shopping online has tremendously improved over the online version of retail shopping. While there is no new innovation, Australians over the last decade have been somewhat slower in the take-up of the e-tailing. However, this is now clearly a thing of the past with today’s net-savvy consumers building online procurement compared to the previous periods. Both the quantity and diversity of goods sold through the business sales online has grown rapidly. Based on reports posted by Forrester research the e-tail marketplace is likely to grow to an estimated figure of about $ 334.7 billion in the 2012 from $ 128.1 billion in 2007. The US online spending rose by 5% to $ 27.12 billion from November 2009 through charismas eve even through individuals spent slightly less than that witnessed in the previous years. Australia’s Clothing and Textile Industry overview and key issues David Jones Limited trades in a clothing and textile industry. Throughout the early years of business development, when the Australian government promoted industrial national building, employment creation and indoctrination, successive governments set trade policies to protect local clothing and textiles manufacturing industries from competing imports (McKinsey, 2010, pp). The intention was to build clothing and textile industry to become a major source of low-skilled employment, especially for when and immigrants. Industrial protection created a branch plant economy in which overseas firms wishing to access domestic market were impelled to establish production facilities in Australia. The world-wide economic crises of 1970s made it increasingly difficult government to maintain demand management policy settings. In the context that increased concern that Australia was falling behind in the race for economic growth, industrial protection came to be viewed not only as inefficient and impractical, but rather impeding Australia’s prosperity (Holton, 2009, pp. 56). The policy community came to learn that Australia has to internationalize its economy and integrate its industries into global trade flows. As the policy setting come in to effect the recession years of 1991 – 1993, large numbers of clothing and textiles firms either closed down or restructured their operations. By 2005, the liberalization process recommended import duty rates on clothing fell to 17.5% and the trend has from then reduced to 10% by 2010 and further it is expected to fall to lower rates as other goods to about 5% by 2015.however these duty rates do not apply universally. As the tariff barriers fall, garment related importing and exporting is governed increasingly by fluctuations in the Australian dollar (Pereiro, 2002, pp. 135). These promoted local production by reducing costs of imported fabrics. In 2007, the local garment and garment related textiles production industries are still declining with production falling by an estimated 8% in the periods between 2005 – 2010, nonetheless, the sector still accounted for over AUD $5 billion of the GDP within the same period, contributing about $ 1532 million of value the economy, which represented 1.6% of total manufacturing industry value added. Employment numbers also continued to decline. By June 2005, the sector was reported to have employed 29,748 people a fall of almost 25% since June 2002. According to the Australian Bureau of statistics time series data for the broader classification, the textiles clothing footwear and leather industries , full time employment dropped by a 60% for a twenty year period ending 2005 (McKinsey, 2010, pp. 231). David Jones Limited Profitability Report Link to the company performance as the graph below demonstrates, there is a correlation between the total STI scheme payments for the Company and the net profit after tax (NPAT) growth over the last five financial periods (McKinsey, 2010, pp, 29). David Jones Limited measures NPAT is measured on an underlying basis and therefore excludes one off transactions. All LTI rights are nil exercise price rights and no consideration is paid when they are granted or when they are considered vest. The firm’s shareholding policy provides that one right equals to a maximum of one share equal a maximum of one share. In addition participants are outlawed from entering into transactions in financial products which operate to limit the economic risk of unvested rights. David Jones Limited vesting of rights is linked to at least one three independently applying performance measures. Total shareholders return (TSR), earning per share (EPS) or even the Net profit after Tax Growth (NPAT) Source: David Jones Annual report 2010, pp, 44 NPAT Annual growth from FY2006 Source: Annual report, 2010, pp. 46 Net Profit after Tax David Jones Limited NPAT growth is measured on an underlying basis excluding one of transactions, the reason for NPAT growth measured replacing earning per share measuring the retention plans increased participation of human resource with a strong senior management. Both NPAT and TSR is selected as the performance measures on the basis that they offer a balance between internal and external measures (Nick Antill, 2005, pp. 223). Share Valuation Earning per share (EPS) EPS is one of the performance measures used for FY2006 - FY2010 long term incentive plan. This represents how much growth in the last year for shares that have been issued by the company. This is expressed as growth in NPAT divided by weighted average number of ordinary shares outstanding during the year (Nick Antill, 2005, pp, 37). The company use EPS as a performance measure in indentifying EPS strong links to shareholder wealth as a consistent payout ratio leading to dividend growth. From the financial reports shown in FY2006 - FY2010, the earnings per share increased all through this period as indicated in the table below. Step 1 Source: Reuters, 2011 Source: Reuters, 2011 Source: Reuters, 2011 Step 2 Reserve bank has reviewed a range of securities that the firm is willing to accept under repurchase agreements. The firm has relieved in its domestic market initial margins that it uses to cut rate the securities charges. The changes are expected to be effected by start of February 2012. The firm has established basis criteria in determining eligible securities. The only change concerns eligibility of securities issued but the authorized deposit-taking institutions. This particularly concerns implementation date, all senior debt securities with a residual maturity which falls within 12 months or less and are issued with AIDs to pubic credit rating for market operations (Reserve Bank of Australia, 2011). Source: Reserve Bank of Australia, 2011 The exposure to each share involves a distribution across large-cap positions on average this is estimated to be 5-6% exposure on average per company. To small-cap positions a minimum of 2% or a maximum of 3.5%. For portfolio that is deemed bias a handful of business entities carry undue risk. Step 3 Source: r= Rf + Beta*(RM - Rf) Where: r- Is the expected return rate on a security? Rf- is the rate of riskless investment RM- return rate of the appropriate asset class r=1.008 +1.46 *(1.0698-1.008) r=2.468*0.0618 r=0.1525 Step 4 r= risk free rate + beta (Market risk premium) r=1.008 + 1.46 r= 2.468 Step 5 The past five years share performance and dividend payments are shown in the two tables below. Source: Annual report pp. 45 Source: Annual report pp. 45 The share price growth rate over the last five years can be calculated to be (18.9+25.2+30.9+34.5+37.2)/5 = 29.34 an average value In determinung the grawth rate, we find the difference between the identified average value and the opening year value. This can be computed as (29.34- 18.9)/18.9= 0.552 Step 6 Price= current dividend (1+growth rate) 16.0(1+0.552) Price = 24.832 Share Investment The overall observation of the financial activities for the last five years shows an improvement of the company performance (Pereiro, 2002, pp. 79). This improvement is evident from FY2006 to FY2010, demonstrating increase in dividend payout. Total Shareholders return is one of the performance measures for FY2006 to FY2010 measuring return a shareholder obtains from ownership of shares in the company. The company’s TSR share price appreciated over the measurement period plus dividends expressed as a percentage. Source: David Jones Annual report, 2010, pp.46 Based on the TSR performance result for the identified period, as it is a reflection of the Company’s performance, this gives a truly comparative external benchmark when measured against a well selected group. The company’s performance ranking rend reveals an upward trend a situation that proves health investment for shareholders (Capiński and Wiktor , 2008, pp. 117). Unlike property or any other business investment, shares investment is extremely liquid. The investor is able to sell shares receiving the proceeds at a shorter period a case that is rarely possible in other form of investment. Minimal outlay, in this company one does not need a lot of capital to purchase shares. David Jones Limited has available capital to taje advantage of the next identifiable economic expansion and related need for capital. References Australia, R. B. (2011, November 26). Media Release. Retrieved 11 21, 2011, from Changes to Eligible Securities and Margining for Domestic Market Operations: http://www.rba.gov.au/media-releases/2011/mr-11-26.html Energy Networks Association. (2008). Market risk premium . Victoria: Australian Pipline Industry Association And grid Australia. Reuters, T. (2011). Finacial times. Retrieved November 21st , 2011, from FT Seasonal Appeal 2011: http://markets.ft.com/research/Markets/Tearsheets/Summary?s=au:DJS David Jones Limited. (2010). Annual Report 2010. Sydney: ASX. Howard, M. (2007). Accounting and Business Valuation Methods: How to Interpret IFRS Accounts. London: Elsevier. Holton, L (2009). Business Valuation For Dummies. New York: John Wiley & Sons. Capiński, M. (2008). Company valuation: value, structure, risk. Frankfurt: Hochschule Hof. McKinsey & Company Inc., T. K. (2010). Valuation: Measuring and Managing the Value of Companies. New York: John Wiley & Sons. Meitner, M. (2006). The market approach to comparable company valuation.London: Springer. Nick Antill, K. L. (2005). Company Valuation Under IFRS: Interpreting and Forecasting Accounts Using International Financial Reporting Standards. Harriman House Limited. Pereiro, L. E. (2002). Valuation of companies in emerging markets: a practical approach. New York : John Wiley and Sons. Read More