A Woolworths store in Cape Town. Picture: REUTERS/MIKE HUTCHINGS
A Woolworths store in Cape Town. Picture: REUTERS/MIKE HUTCHINGS

David Jones, Woolworths’s ill-considered Australian acquisition, is in irreversible structural decline, making the job of Roy Bagattini, the new boss of the Cape Town-based company, almost impossible.

In an earnings report last week Bagattini, who took over from Ian Moir about eight months ago, spoke little about fixing David Jones’s operations. He is devoting more of his energies to its capital structure, which threatens to drag Woolworths’s profitable upmarket clothing chain into a potentially messy collapse.

It makes sense to focus on the company’s debt as there seems to be little Bagattini can do to secure the future of David Jones as a modern, profitable retailer, whose department store business model was once the cutting edge of retail, luring millions of consumers into its stores with a dizzying collection of products.

In an era of online retail and easy-to-navigate shopping malls with dozens of specialised retailers, which tend to have a reputation for superior product selection in a defined category, the raison d’être for department store outlets such as the more than 180-year-old David Jones has been under a shadow of doubt for years.

Alongside most other clothing retailers worldwide, David Jones is struggling to compete with fast-fashion retailers such as Inditex’s Zara and Hennes & Mauritz (H&M), the European duo that pioneered the manufacturing of budget-friendly apparel in response to the latest fashion trends.

Moreover, it is difficult to see how David Jones can survive an onslaught from the world’s biggest online retailer, Amazon.com, which was cleaning up even before the coronavirus-induced upheaval choked off sales for physical department store chains.

For those reasons, Bagattini is rightly making the David Jones capital structure, rather than operations, a priority — perhaps also in implicit acknowledgment that, unlike his predecessor Moir, he has no experience in the Australian retail market, having worked as an executive in the US for Levi Strauss & Co since 2013.

The Australian division is struggling to shoulder the equivalent of a R4bn debt pile, which counts assets of Country Road and David Jones as collateral. With the Covid-19 pandemic destroying sales, Woolworths was forced to set aside almost R1bn to cover the losses and secure creditor approval to suspend covenant measures — the agreed levels of borrowings as a proportion of earnings.

The closure of stores to reduce trading space by at least 20% over the next two years will go a long way in cutting costs

 

That money is about a quarter of Woolworths’s core earnings — earnings before interest, tax, depreciation and amortisation (ebitda). It underlines the urgency of cutting the division’s debt load to give Bagattini the latitude to delink Country Road from David Jones.

He has mapped out a coherent plan that seems to be bearing fruit, if the share price reaction since the company issued its annual earnings report is anything to go by. The stock is up almost 8% since Thursday, outperforming a slight drop in the broader JSE all share index.

It is easy to see the reasons some investors are optimistic. The closure of stores to reduce trading space by at least 20% over the next two years will go a long way in cutting costs.   

The sale of David Jones’s sprawling properties should also unlock some value and free the management to focus on retail rather than property management. Woolworths has already offloaded a property worth R1.5bn in recent months. That the company is already evaluating offers for the remaining David Jones real estate indicates there is no shortage of buyers.

David Jones is furthermore in better operational shape than it was a year ago, when it suffered a loss of more than R4bn. It narrowed that loss by more than 90% in the year to end-June as online sales offset weak physical stores sales in a reflection of both a business model in decline and the Covid-19 pandemic.

If Bagattini is able to keep David Jones on this trajectory, cut trading space further and sell properties, he should be able to raise enough money to pay down debt, set Country Road free and work out the future of David Jones.

Like Edcon and many other department stores worldwide, the future is bleak for businesses that lose relevance to consumers.

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