Disclosure Index
The financials in 2010 and 2011 have been prepared according to the relevant AASB standards. The expansive disclosure section is quite thorough, informing potential investors and current shareholders about existing trends within the company. The financials disclose all required information about the company’s operations, including the detailed requirements for financial instruments and other items that have to do with extended credit. During the year under report, there were quite a few changes in the AASB reporting requirements, as the financials note, but none of those changes had a significant effect on the reporting methodology at David Jones.
The 2010 and 2011 financials show a continued dedication to the strategic plan that had been put in place in 2003, extending the employee benefit policy while remaining compliant with AASB 119. A benefit of this policy was enhanced metrics that quantified, in part, the successful performance of management at the director level and below, as well as showing the enhanced compensation that employees and management earned as a result of performance incentives, both monetary and non-monetary. The explanation of these benefits in the annual reports is exhaustive and complete. The seismic changes that had occurred in Total Shareholder Return (TSR) in prior years did not occur to the same degree in either reporting year, which was a welcome sign for investors. While the trend in sales and revenues was definitely downward, the company was able to stabilize shareholder return through a more effective system of controlling costs. No one in the industry had been prepared for the upheavals of 2008; however, because they had been so recent, when hard times returned in 2011, management was more prepared for a variety of contingencies.
The depth of the disclosures, particularly in the area of employee incentive compensation, reaches the voluntary level by going beyond the mandatory AASB requirements in terms of specifying the type and form of incentive compensation. The rest of the disclosures, in all areas, meet the AASB requirements. Indeed, as confirmed by the independent auditors, David Jones has provided a set of financials that not only comply with AASB but also with AGAAP, AIFRS and ASX. This compliance has helped the company maintain a top reputation with investment professionals, despite the downturn in overall sales in the retail industry.
Accounting Analysis – Property, Plant and Equipment (PPE)
In accordance with the AASB requirements, David Jones has depreciated its property, plant and equipment using the straight-line method over the course of each item’s estimated useful life. The exact length of this useful lifetime varied, depending on the item in question; for example, the improvements on leasehold ranged in useful life from 10 to 25 years. Both the income statement and the notes on PPE reflect this depreciation. Also, on the balance sheet, the residual values of each asset and the useful lives were adjusted to show the passage of another year. Specifically, AASB 116 requires that each part with a significant cost be depreciated separately. This provision requires a more accurate picture of assets from the reporting company, but it also allows companies to differentiate depreciation time.
Benefits of using this straight-line depreciation and using accurate useful life spans is to enable the distribution of expenses over the life of the item in question, maximizing net profits where possible during each individual financial year.
The use of this methodology is consistent with the requirements of the AASB provisions for depreciation reporting. For example, AASB 116 requires that depreciation charges be considered as a profit or loss unless it is a part of another asset’s carrying amount. After reviewing the financials and the notes of the auditor, it is clear that David Jones followed this protocol in the reporting. There were no assets that qualified under the “future economic benefits” provision, except for those included in the goodwill section. This use of goodwill to describe a future building fits within AASB 116 as well.
AASB 116 also requires that an asset’s residual value go under review at least annually; according to the reports provided, this value is calculated at the end of each fiscal year, and David Jones does this in its reports. There were also no assets that were claimed as having exceeded the carrying amount in residual value, and so there were no zero charges for depreciation.
Accounting Analysis – Revenues.
While both cash and accrual basis methods are acceptable under AASB guidelines, because David Jones is a retail business, accrual accounting is the required recognition method for revenue, per AASB 118. This means, of course, that revenue goes into the books when the sale takes place, rather than when the payment comes in. This has the largest effect with the recording of gift cards and credit purchases. With gift cards, the payment comes in as long as months before the sale takes place; with credit purchases, the sale takes place before the revenue comes in the door.
In its reporting, David Jones not only complied with the terms of accrual accounting but also correctly divided its disclosure of revenues by category. The bulk of David Jones’ revenue naturally came from the sale of goods, the revenues from other sources, such as interest, appear separately. In terms of the sale of goods, David Jones’ reporting complied with these provisions from AASB 118:
Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(b) the entity retains neither continuing managerial involvement control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Company Overview: A History of David Jones & Co.
In 1838, the first David Jones store opened at the intersection of George and Barrack Streets. The initial mission of the company was “to sell ‘the best and most exclusive goods’ and to carry ‘a stock that embraces the everyday wants of mankind at large’”(About David Jones, 2011). While the store initially failed after his retirement, he returned to the business and returned it to its former glory; his son had the idea to convert the operation to an early form of what would become a department store – which opened in 1887 at the same location. This store also operated the company’s mail order department – a very early version of Amazon.
In 1899, to cut back on the company’s need for imported goods, David Jones opened a factory, so that it could produce what it needed. In 1927, the second store opened, in Hyde Park. At the time, it was predicted that this store would fail, because it was out of the retail shopping district, but the grand scale of this store brought the shopping district to it. This location is still the main David Jones store. Between 1947 and 1959, the operation grew to eight locations. In the 1990’s, David Jones was one of the first retailers to introduce a rewards program to build customer loyalty, and it continued to be a pioneer by setting up one of the first retail ordering websites.
As with many retailers, David Jones’ fortunes have been highly sinusoidal since the global recession came in 2008. The stock price plummeted almost 41 percent in 2008, only to shoot back up 68 percent in 2009. However, it fell 17 percent in 2010 and another 46 percent in 2011 (Financial Times, 2012). This trend mirrors that of Myers Holdings, Ltd. and The Reject Shop, two of David Jones’ main competitors in Australia, while the Carindale Property Trust, while suffering the same degree of decline in 2008, has not had the mercurial performance of the other three since then. The Dow Jones Industrial Average and the S&P 500, two major international indices, also fell sharply in 2008 but have increased somewhat steadily since then (Financial Times, 2012).
In the area of branding, David Jones’ pattern (a houndstooth, with black on white) is as recognized in Australia as the Target symbol in the United States, or the golden arches of McDonald’s throughout much of the world. In 2006, it was named one of Australia’s ten most beloved trademarks (IP Australia, 2006). Celebrities who have appeared in David Jones spots include models Megan Gale and Miranda Kerr and actresses Elizabeth Hurley and Kim Cattrall (Burns, 2005).
Recommendations.
Inventories remain high, especially for a retailer at the price points that David Jones likes to maintain. Inventory at the end of FY 2011 was 2.3 percent higher than at the same point in 2010. It is challenging to reduce inventory during a recession without having to drive pricing below acceptable levels of profit. The downturn in sales also caused cash flow to take a hit; while cash flow was at $100.9 million for FY 2011, a boost in sales would have pushed that even higher.
As it was, discounting took a major bite out of profits. The gross profit dropped 60 basis points from its 2010 levels. June and July 2011 were the worst in terms of sales totals; those months required significant discounting to move inventory out the door (David Jones Annual Report 2011). The company also expanded shopping hours throughout the entire network of stores; while this did increase sales somewhat, it also increased most of the variable costs of doing business, so the effect on profitability was negligible. It did position the brand as accessible to more people, at different times of the day or night.
While many retailers struggle to maintain an efficient CODB percentage (cost of doing business) in a recession environment, David Jones improved by 80 basis points over 2010 to 29.8 percent (David Jones Annual Report 2010; David Jones Annual Report 2011). Going into 2012, the company reports an additional 14 projects that are designed to improve overall efficiency, and in writing the upcoming FY2013 - FY2016 Strategic Plan, management plans to include several other efficiency initiatives.
Going forward, the company needs to continue to bolster its online presence. In an atmosphere of recession, customers will go to discount sites such as Amazon and Overstock to find their goods. There needs to be a reason for customers to stick with traditional retailers; while discounts can certainly provide a valid reason, they cannot account for a company’s primary strategy, as they will eat into profits. Also, while cost control initiatives are an important part of any streamlining process, cutting costs can eventually cut off the revenue supply to important elements of operations, such as customer service and maintaining a clean corporate image through keeping stores pleasant and well staffed.
In short, the intangible qualities of shopping at David Jones need to be maintained, and corporate management must find a careful balance between efficiency and elimination of crucial elements of operations. If the company can maintain this balance, it can continue to survive in an inclement environment for brick-and-mortar retailers with extensive overhead and inventory costs. The famed black and white houndstooth pattern that so many customers have come to associate with a trip to David Jones needs to retain its familiar, positive connotations.
Other retailers have overcome similar difficulties by maintaining a commitment to high standards in branding and customer service. In the US market, the retailer Target has always remained behind Walmart in terms of sales. The temptation to cut prices to the bone and trim costs as well would have been deadly for Target – as the example of Kmart showed. Walmart has no peer when it comes to maintaining lower prices and forging relationships with suppliers that keep acquisition costs lower for Walmart than for its competition, simply because of the scale involved.
And so Target when slightly upscale, moving to the Super Target model to counteract the Super Walmart trend. The ambience inside Super Target is slightly more high-end, though. There are more cash registers than at Walmart, and the décor is more pleasant. While Walmart has high ceilings and is divided into long, endless rows, Super Target has more segmentation into sections, which gives it more of a department store feeling. Also, the store goes to the trouble to use higher-end products – not only in its grocery aisle, where specialty foods sit alongside more value-priced items. It is possible to shop at Super Target and spend only slightly more than at Super Walmart, but it is also possible to purchase higher-end items in just about every area. The more pleasant ambience makes this a more tempting prospect for Super Target customers.
In the area of accounting, David Jones needs to continue its commitment to meeting and exceeding AASB standards of reporting compliance. It can be tempting to cut corners in areas of reporting to meet shareholder expectations, particularly when shareholders can become jittery and start jettisoning stock to have the cash, but running afoul of reporting standards will only harm the company later.
Works Cited
AASB 116. Web. Retrieved 4 January 2012 from
http://www.aasb.com.au/admin/file/content105/c9/aasb116_07-
04_compjun09_07-09.pdf
AASB 118. Web. Retrieved 4 January 2012 from
http://www.aasb.com.au/admin/file/content105/c9/AASB118_07-
04_COMPmay09_01-10.pdf
About David Jones, 2011. Web. Retrieved 4 January 2012 from
http://www.davidjones.com.au/About-David-Jones
Burns, J., 2005. Hurley’s charms. The Age 1 September 2005. Web. Retrieved 4
January 2012 from http://www.theage.com.au/news/fashion/hurleys-
charms/2005/08/31/1125302632634.html
Financial Times, 2012. David Jones Ltd. Web. Retrieved 5 January 2012 from
http://markets.ft.com/research/Markets/Tearsheets/Summary?s=au:DJS
IP Australia, 2006. Trademarks Centenary 2006. Australian government.
