David Jones owner Woolworths Holdings cautious on Australian economic outlook

The owner of David Jones and Country Road is back in the black but warns its outlook is clouded by the uncertainty of lockdowns.

David Jones’ online sales increased by 55.5 per cent for the half, contributing 17.7 per cent to total sales over the half. Picture: NCA NewsWire / Gaye Gerard

Woolworths Holdings chief executive Roy Bagattini said the uncertainty of future lockdowns in Australia caused by COVID-19 will cloud the outlook for David Jones but the South African owner of the nation’s upmarket department store “has come through a painful process” to improve the businesses’ profitability.

Mr Bagattini told The Australian he believed David Jones would one day justify its $2.2 billion price tag when it was bought by Woolworths Holdings in 2014 as the benefits of recent difficult decisions such as selling off stores, paying down debt, closing down floorspace and hacking away at costs returned it to profit growth.

“I certainly hope so. In fact we are doing a lot as you can appreciate and we have come through a very painful process and it has been very difficult,” Mr Bagattini told The Australian as David Jones reported a bounce back to the black with first-half adjusted earnings of $56m, which was 33.3 per cent up on the prior period.

However, David Jones much-hyped push into operating high-end food halls in Australia continues to be a drag on the bottom line and lost $12m in the December half.

Woolworths Holdings took in a total of more than $70m in JobKeeper payments for its David Jones and Country Road Group business in Australia.

“But frankly even through COVID, work is being done shoring up the financial health of the business, it has been very important, and we focused primarily initially on our balance sheet, we had these very high levels of debt which were not sustainable … and we had to take some really tough decision for a couple of our key assets.”

Mr Bagattini as part of this review David Jones and its stablemate Country Road Group were also financially separated to reduce complexity and give both businesses the opportunity to pursue profitable growth and strategies.

“And we do see on a go-forward basis an important return to profitability for David Jones,” Mr Bagattini said.

A tough cost cutting strategy and an easing of heavy discounting also helped the bottom line and saw David Jones back in profit after it reported a $33m loss for 2020 that was dominated by the emergence of COVID-19 and lockdowns.

“We are satisfied with our first half performance in the context of a tough trading environment, and the ongoing impact of Covid-19. Notwithstanding these challenges, all our businesses concluded the half with improved trading momentum in the last six weeks of the period,” Mr Bagattini said.

“The team focused on actions to stimulate trade, strengthen online capabilities and protect margins through cost containment, and tight inventory management, which resulted in good profit growth and improved cash flow for the half.”

David Jones also accepted $35m in JobKeeper from the Australian government and won some rent relief from landlords. Mr Bagattini said the money was used to keep staff employed through the pandemic with no bonuses paid. It had no plans to pay back the government wages subsidy.

“JobKeeper support was quite integral to us being able to sustain and retain all our people throughout the COVID cases, we never laid off anyone, we never stood anyone down and even through the Victoria state lockdowns we continued to pay our people and keep them employed.”

Woolworths Holdings said David Jones sales over the 26-week period to December 27 declined by 8.8 per cent and by 10.5 per cent in comparable stores. Excluding Victorian stores, which traded significantly down on the prior period due to the extended lockdown, the balance of the David Jones business, including online, grew by 5.9 per cent.

Online sales increased by 55.5 per cent for the half, contributing 17.7 per cent to total sales over the half.

At its Country Road Group business, which is a stable of fashion outlets including Country Road, Politix, Mimco, Trenery and Witchery, it delivered strong sales growth of 6.7 per cent in the last six weeks of the current period, underpinned by new product ranges, particularly in the Country Road business. Adjusted operating profit for the Country Road Group division increased by 44.6 per cent to $94m.

Sales over the half declined by 5.2 per cent and by 2.4 per cent in comparable stores, negatively impacted by the lockdown in Victoria and in CBD and airport stores.

Online sales increased by 52.5 per cent and contributed 31.6 per cent to total sales for the period.

A recovery in the Australian economy could be hampered by a pullback in government spending and initiatives that have to date supported the Australian economy through the COVID-19 pandemic.

“In Australia, economic fundamentals are stronger and more supportive of an earlier recovery in economic activity, but we are mindful that government initiatives, which have buoyed consumer spend, are coming to an end,” Woolworths Holdings said.

Country Road delivered strong sales in the last six weeks of the current trading period.