By Patrick Hatch
South African retailer Woolworths Holdings has written down the value of its $2.1 billion investment in David Jones by a third, blaming the tough market and fashion missteps for the department store's waning fortunes.
The move is expected to heap pressure on fellow department store Myer, which has come under scrutiny over the valuation of brands and goodwill on its balance sheet.
Woolworths said overnight that it was recognising a $712.5 million non-cash impairment charge against the carrying value of David Jones, which it bought in 2014.
Tough trading conditions have been blamed for the write-down of David Jones.Credit: Erin Jonasson
A spokesman said a "vast majority" of the write-down relates to goodwill. In June 2017 Woolworths valued its goodwill and brands at $1.5 billion.
"Today’s write-down reflects tough and unprecedented trading conditions, a cyclical downturn and structural changes that have impacted performance across the Australian retail sector," Woolworths said.
"This impairment has been exacerbated by delays and poor execution in certain of our key initiatives at David Jones."
David Jones' comparable sales fell 3.3 per cent in the six months to December 24, Woolworths said, but improved 0.6 per cent in the last six weeks of the half.
Comparable sales fell 0.7 per cent last financial year and the department store's profit slumped about 30 per cent.
Management blamed some of that performance on the poor quality of its private label fashion lines, which it said would be improved by moving management of those products from South Africa to its Country Road Group team in Australia.
Woolworths' board remained committed to the "transformation" of David Jones and would continue to invest in the business, the company said.
The revaluation comes amid challenging conditions in the retail sector which have hit department stores especially hard, with David Jones’ biggest rival Myer reporting a disastrous 5 per cent drop in sales for the first two weeks of December.
Myer has warned investors to expect its first-half profit to be "materially below" last year's $63 million.
Questions have also been raised about Myer's balance sheet and whether it needs to write-down the value of intangible assets.
In July 2017 Myer had a total of $985 million in intangible assets, including $465 million in goodwill and $422 million in brand names and trademarks, easily eclipsing its current market value of $513 million.
Morgan Stanley analyst Tom Kierath in December said that given Myer's poor financial performance, "we think the carrying value of goodwill and brand names must be called into question".
Myer was defended its accounting when quizzed at its November annual general meeting, while the Australian Securities and Investments Commission was reportedly keeping an eye on the matter.
On Thursday a Myer spokesman said the company would assess the carrying values of intangible assets "as part of the half and year end reporting process", including its half-year trading update on March 21.
The corporate watchdog has previously called out sectors including media and resources in which the value of companies' assets are vulnerable to disruption, but has not singled out retail for scrutiny.
Last financial year Myer wrote down the goodwill of its Sass & Bide brand by $27 million, and wrote off the $6.8 million stake in had in Topshop’s Australian operations.
David Jones has said it is adapting to the tough environment by investing in new merchandising and customer relationship systems, renovating its flagship store on Sydney's Elizabeth Street and growing its upmarket food offering.
It has also moved its head office from Sydney to Melbourne in a move it expects to save $10 million a year.