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Subject Code: ACCT 90004 Subject Name: Accounting for Decision Making

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361828 Leroy DSouza

613373 Laisa Salavuki Tikoduadua

619571 Oyun Batkhuyag

178357 Michael Griffith

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David Jones: 2013 Annual Report performance analysis

Business Analysis (Q1) David Jones Limited (DJ) is a department store retailer. Operating continuously in Australia for

176 years, DJ currently runs 38 stores and an online presence.1 With an upmarket focus, its stores

range across retail segments including fashion, clothing, cosmetics and accessories, books, luggage,

consumer electronics, white goods, furniture and food. DJ also provides financial services through

an alliance with American Express. The key profit drivers of the business are its womenswear,

cosmetics, accessories and financial services operations and, in recent years, DJ has rebalanced its

category mix in favour of these segments as profitability has fallen across segments such as

electronics, white goods and furniture.2

While recent performance has been strong, DJ's future profitability has experienced a decline in

sales due to reducing consumer confidence and the growth of online shopping channels. In

response to these risks, DJ has adopted a strategic focus on transformation, store growth and

strengthening its core business.3 Transformation seeks to meet the challenges of online shopping

through broadening the business from a "bricks and mortar" to an "omni-channel retailer,

including through significant investment in technology and fulfilment infrastructure. Store growth

seeks to grow DJ's property portfolio in high value areas and innovate in store format, while

strengthening core business involves a focus on improving Gross Profit (GP) margins, reducing its

cost of doing business (CODB) and introducing new initiatives to manage inventory more

efficiently.4

1 David Jones Limited, Annual Report 2013 (2013), available at . 2 Ibid. 3 Ibid. 4 Ibid. See also David Jones Limited, David Jones Future Strategic Direction, available at .

Ratio Analysis (Q2) To assess DJs performance against each of the three limbs of its current strategic focus, this

section analyses DJs current:

profitability and cost performance, to assess core business strength;

inventory turnover, to assess operational efficiency; and

liquidity and financial health, to assess capacity for store expansion and omni-channel

transformation.

We test this analysis in three ways: against DJs historical performance,5 against the performance of

DJs principal Australian competitor, Myer Holdings Limited (Myer),6 and against the performance

of a leading representative online competitor, Net-A-Porter Group Limited (Net-a-Porter).78

5 DJs 2012 and 2011 annual reports are available at . Hyperlinks will be omitted for future references. 6 Myers 2013, 2012 and 2011 annual reports are available at . Hyperlinks will be omitted for future references. 7 Net-a-Porter is a privately held company and so does not publish an annual report. However, its publically lodged financial statements are available online including at . Hyperlinks will be omitted for future references. Net-a-Porter competes with DJs target Australian market in the key business segments of fashion, clothing, cosmetics and accessories. For the purposes of this report, we have assumed there is no relevant financial impact as a result of Net-a-Porters lack of exposure to the other retail segments in which DJ and Myer compete (eg white goods and consumer electronics). 8 In preparing this analysis, we have assumed that there are no accounting errors in the financial statements made publically available through DJ, Myer and Net-a-Porters, and that any differences in accounting methods and assumptions used by these companies is of negligible effect. For completeness, we note that there are a range of other drivers of business performance (such as brand and organisational culture) consideration of which is not within the scope of this report.

Profitability and cost performance

The gross profit margin and CODB-to-sales position of each of DJ and Myer9 reflects the relative

market positions of these companies: DJ, with its focus on high-end brands, incurs a higher

proportion of costs in the supply chain, while in recent years Myer has enjoyed an increase in gross

profit in the mid-market as a result of lower costs of goods sold (COGS).

However, Myers COGS advantage levels out when comparing operational costs. DJ earns its

revenue more efficiently than Myer, likely driven by its smaller property portfolio and superior

revenue-per-store performance (an average $48.6 million sales across 38 stores,10 compared with

Myers average $39.1 million sales across 67 stores11).

In an environment of falling sales for the company, DJ is right to nominate CODB reduction as a

key strategic priority. Although DJs annual report notes a one-off higher depreciation charge as a

result of increased technology investment as being a key cost driver,12 the growth DJ is facing in

employee and leasing costs will be very difficult to sustain in a period of flat revenue growth.

Compared with Net-a-Porter, DJ is clearly at a disadvantage competing on gross profit margins as a

result of DJs higher COGS. This may reflect Net-a-Porters closer geographical proximity to

9 Note that Myer reports sales revenue slightly differently to DJ: Myer reports both total sales value (excluding an offset for concession sales) and sale of goods (incorporating the offset). DJ only reports revenue from sale of goods incorporating concession sales offset. For the purpose of calculating ratios in

this report, we take Myers sale of goods revenue as the comparison figure. 10 David Jones, Annual Report 2013 (2013). 11 Myer, Annual Report 2013 (2013). 12 David Jones, Annual Report 2013 (2013).

Western European supply chains, although Net-a-Porters advantage in this area is offset by the

higher distribution expenses it incurs.13

On a superficial comparison of their respective COGS/sales performance, DJ outperforms Net-a-

Porter in its operational efficiency; however, Net-a-Porters high and growing CODB base likely

reflects significant investment in expansion activities. Given Net-a-Porters double digit sales

growth, we would expect its CODB-to-sales growth to peak and then fall - an outlook on which DJ

certainly cannot rely.

Inventory turnover

The inventory turnover ratio measures the number of inventory production and sales cycles that

occur during the accounting period, with a higher ratio generally indicating faster movement from

production to customer, increasing sales and decreasing storage costs.

DJ clearly enjoys superior inventory performance compared both to Myer and Net-a-Porter. DJs

annual report provides that to improve sales it has entered into an agreement with Dick Smith

Electronics, who will purchase aged inventory from the company.14 This has led to an increase its

stock intakes, and maintaining newer stock.

Although Myer has a lower inventory turnover result, it has improved compared to recent years as a

result of previous technology investments.15 It may be the case that Myer is awaiting an increased

efficiency in future years from its capital expenditure in the previous years.

13 Net-a-Porter, 2013 Financial Statements (2013). 14 David Jones, Annual Report 2013 (2013). 15 Myer, Annual Report 2013 (2013).

DJ has nearly double the turnover of Net-A-Porter. On its face, this result suggests DJ operates its

inventory more efficiently than Net-a-Porter and that inventory management is therefore a point of

competitive advantage for DJ. However, to be conclusive in this view, we would need further

information about Net-a-Porters inventory strategy it may be that Net-a-Porters online only

business model necessitates different approaches to inventory management than used by bricks-

and-mortar retailers.

DJs Debt-to-Equity (DE) ratio is a guide to its reliance on debt as a source of financing, and its

Capital Acquisitions ratio indicates whether it has sufficient cash flow from its operating activities

to further the investments outlined in its strategic plan.

Based on the 2013 results, DJ has reduced its level of debt compared to previous years, which is

attributable to its Dividend Reinvestment plan.16 To match its growth and transformation strategy it

is clear from both the Capital Acquisitions and DE ratio that DJ is well positioned to take on

higher levels of debt to fund further capital expenditure as compared to an expensive equity raising.

Myer in comparison to DJ has a higher DE ratio, most likely due to prior capital expenditure in

past years, as there is a decreasing trend in their level of debt as this is paid off. However, DJs

lower acquisition ratio compared to Myer is due to the sudden increase in expenditure by DJ since

2012.

16 Davis Jones, 2013 Annual Report

Due both to Net-A-Porters aggressive growth strategy and its comparatively limited cash flow

available, there is a clear reliance on debt shown by both the Acquisitions and DE ratio. In

contrast, with its established position in the retail sector, DJ has ready access to necessary funds and

capability to grow and potentially capture significant market share in the online industry.

Statement of Cash Flows analysis (Q3) The Statement of Cash flows explains the different categories of net cashflow during the period and

its effect on liquidity and solvency within the business.17 A brief summary of the 2013 statement

for DJ is included below.

The three main categories of cash flow include operating, investing and financing activities. Cash

flow from operating activities encompasses all the earning related activities,18 such as cash receipts

from customers, interest and commission received, payments to suppliers and employees and

income tax paid.

Net cash flow from investing activities include cash inflows generated from acquiring and the sale

of business assets.19 While financing activities depicts cash flows related to transactions with

lenders and investors of the business.

17 Potter, B. N., Libby, R., Libby, P. A., & Short, D. G. (2010). Accounting in Context Australia. Mcgraw - Hill Australia. 18 Bernstein, A.L.,(1993), Financial Statement Analysis Theory, Application , and Interpretation. USA: R.R. Donnelley & Sons Company. 19 Potter, B. N., Libby, R., Libby, P. A., & Short, D. G. (2010). Accounting in Context Australia. Mcgraw - Hill Australia.

As per the analysis, the increase in outflow of financing activities denotes the debt reduction that

DJ is undergoing. The cash flows from operating and investment activities provides an insight to

DJs Capital Acquisitions capability.

Income Statement and Balance Sheet analysis (Q4) Companies make estimates because some instruments do not have a set marketable or a

determinable value, while other estimates are necessary in providing a true and fair view of the

company. Users are provided with accompanying notes to explain the reasoning behind the

estimates.

In the Statement of Comprehensive Income for DJ, the depreciation expense charged in a given

financial period is calculated using a straight-line basis over the estimated useful life of buildings,

plant and equipment (as shown in the table below).20 As the useful life of the asset is estimated at

the discretion of the management team, the depreciation expense charged every year is directly

affected by this estimation, as the cost of the asset is equally spread across its useful life.

This relates back to the ratio analysis provided above, as the depreciation expense is a CODB. If

DJs management team decides to set a longer useful life for a given fixed asset, that would lead to

lower CODB, hence lowering expense to sales ratio. Moreover, DJ state that assets residual values

and useful life are reviewed, and adjusted if appropriate, at each balance date21 which can allow

them to exercise a level of control over the expenditure shown on the financial statements.

In the Statement of Financial Position, DJ management applies its professional judgement when

stating the value of Accounts Receivable. An Allowance for Doubtful Debts is created to estimate

20 David Jones, Annual Report 2013 (2013). 21 Ibid.

debtors that may default or take longer than the allowed credit term to pay, which ensures that the

assets are not overstated. DJ has developed an Aged Analysis of Receivables with the credit quality

of debtors being constantly monitored with reference to historical default rates, payment history,

account aging, borrower specific events, consumer credit bureau and other publicly available

information.22

It is important for DJ to ensure that its Allowance for Doubtful Debt is set prudently. A higher

estimation of the Allowance for Doubtful Debts would lead to a lower Net Receivables value and

thus a decrease in working capital, which indicates an increase in cash inflow from operating

activities. This provides an improved figure for the Capital Acquisitions ratio hinting that the

company has an increased ability to invest in capital expenditure from existing cash flows, which is

incorrect.

22 Ibid.

References Bernstein, A.L.,(1993), Financial Statement Analysis Theory, Application , and Interpretation. USA:

R.R. Donnelley & Sons Company.

David Jones, Annual Report 2013 (2013).

David Jones, Annual Report 2012 (2012).

David Jones, Annual Report 2011 (2011).

Myer, Annual Report 2013 (2013).

Myer, Annual Report 2012 (2012).

Myer, Annual Report 2012 (2011).

Potter, B. N., Libby, R., Libby, P. A., & Short, D. G. (2010). Accounting in Context Australia. Mcgraw

- Hill Australia Pty.

Net-a-Porter, Financial Statements 2013 (2013).

Net-a-Porter, Financial Statements 2012 (2012).

Net-a-Porter, Financial Statements 2011 (2011).

Appendix

Financial Statements A reference copy of all the financial statements used in the analysis can be found below.

David Jones Limited FY13:

https://www.dropbox.com/s/a4g97ti24s8j3tt/David%20Jones%20Limited%202013%20

Annual%20Report.ashx.pdf

David Jones Limited FY12:

https://www.dropbox.com/s/175925qj2wmkxue/David%20Jones%202012%20Annual%

20Report.ashx.pdf

David Jones Limited FY11:

https://www.dropbox.com/s/xxt69hu9ck2vuyp/David%20Jones%202011%20Annual%2

0Report.ashx.pdf

Myer Holdings Limited FY13:

https://www.dropbox.com/s/5dg68hqb74u9va0/Myer_Annual_Report_2013.pdf

Myer Holdings Limited FY12:

https://www.dropbox.com/s/5pgv5jctxbufy1o/Myer_AR12_FINAL.pdf

Myer Holdings Limited FY11:

https://www.dropbox.com/s/zx25lakqoy4a4m5/Myer_Annual_Report_2011.pdf

Net-A-Porter Group Limited FY13:

https://www.dropbox.com/s/kk4pmokcy2mj5a4/NAP2013.pdf

Net-A-Porter Group Limited FY13:

https://www.dropbox.com/s/l7kb25lgo602tms/NAP2012.pdf

Net-A-Porter Group Limited FY13:

https://www.dropbox.com/s/leivc584i977r79/NAP2011.pdf

Key Figures from the Financial Statements 2013 ($000), 000 for NAP 2012 ($000), 000 for NAP 2011 ($000), 000 for NAP

David Jones

Myer Net-a-Porter

David Jones

Myer Net-a-Porter

David Jones

Myer Net-a-Porter

Total Equity 801,096 905,642 96,461 775,704 877,680 84,350 785,480 861,330 70,757

Net Operating Cash flow

180,036 225,525 18,556 196,737 179,914 (22860) 182,438 227,051 39,489

Revenue 1,845,012 2,621,242 434,676 1,867,817 2,612,700 368,114 1,961,744 2,666,803 238,072

Net Investment Expenditure

78,752 66,956 30,177 81,373 46,409 22,963 81,517 160,650 21973

Gross Profit 697,044 1,311,611 198,294 699,830 1,288,421 151,837 767,270 1,271,630 117,831

COGS 1,147,968 1,450,678 236,382 1,167,987 1,464,574 216,277 1,194,474 1,551,112 120,241

CODB 606,612 1,007,000 191,783 594,835 976,600 149,629 568,500 933,700 83,368

Total Liabilities

436,689 1,034,063 119,032 465,193 1,040,513 91,280 429,070 1,116,632 69,681

Inventory 251,543 363,880 108,241 279,099 385,702 95,497 288,850 381,261 66,410

Ratio outputs 2013 2012 2011

David Jones

Myer Net-a-Porter

David Jones

Myer Net-a-Porter

David Jones

Myer Net-a-Porter

Gross Profit Margin (%)

37.78 41.71 45.62 37.47 41.31 41.25 39.11 40.26 49.49

CODB/Sales (%)

32.88 38.42 44.12 31.85 37.38 40.65 28.98 35.01 35.02

Inventory Turnover

4.33 3.87 2.32 4.11 3.82 2.67 4.18 4.23 2.38

Debt-to-Equity

0.55 1.14 1.23 0.60 1.19 1.08 0.55 1.30 0.98

Capital Acquisitions Ratio

2.29 3.37 0.61 2.42 3.88 (1.00) 2.24 1.41 1.80

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