The sale of 184-year-old retail chain David Jones at a massively discounted price shows department stores continue to lose value and will face greater challenges next year as interest rates bite.
This week, Woolworths Holdings Limited (WHL) — which has no connection with the Australian supermarket chain — sold David Jones (DJs) to Sydney private equity firm Anchorage Capital Partners.
Anchorage reportedly paid about $100 million for the stores — a price neither company has confirmed or denied.
It came after WHL, a South African company, paid more than $2 billion for David Jones in 2014, as part of former chief executive Ian Moir's ambition to turn WHL into a leading force in the southern hemisphere.
The aftermath was Woolworths Holdings writing down more than $1 billion from the value of DJs in 2018 and 2019.
Markets analyst Roger Montgomery said department stores like David Jones would continue to face challenges as online competitors took their market share.
"The days when department stores dominated retail are long gone," he said.
Interest rates to dent retail sales in 2023
Retail spending is set to drop off next year as interest rates bite.
"David Jones has had a huge number of challenges that other department department stores have also had to face, but the consequences for most of them has been that they've become smaller," he said.
"Anchorage's purchase, which is 5 per cent of what WHL paid for it, is testament to the fact that they have become smaller and less relevant businesses."
WHL has sold off assets in recent years to prop up DJs, including three of its four CBD properties.
However, its deal with Anchorage does not include Melbourne's Bourke Street building, which is estimated to be worth around double what the private equity firm paid for the DJs chain.
Instead, David Jones will lease the building from Woolworths Holdings, which is expected to eventually sell it.
"It's the end of probably an unstable marriage," retail analyst and chief executive of Retail Doctor, Brian Walker, said of WHL's sale of DJs to Anchorage.
DJs has churned through a list of chief executives in in recent years, but despite the chain's troubles, Mr Walker is optimistic about its future.
"I think it will continue to grow, and already there are some reports saying that Anchorage can expect to see up to $500 million short-term benefits to investors," he said.
"Will they make money? Absolutely, they will because David Jones is an iconic brand, and has a higher disposable income customer.
"The other side of the coin is the risk that a private equity company does what private equity companies do: they pump the tyres up, they take all the costs out of the business, reduce its ability to reinvest its capital, make a quick dollar out of it and leave the carcass."
Woolworths Holdings will retain ownership of Country Road Group, which also includes brands Witchery, Trenery, Mimco and Politix.
What's next for David Jones?
David Jones has 43 stores in Australia and New Zealand and employs 7,500 people.
Unsurprisingly, David Jones chief executive Scott Fyfe is upbeat about the retailer's future.
"We're really focused on the customer experience in our stores and online channels," Mr Fyfe said.
"In line with our strategy, over the last two years, we've been right-sizing our store portfolio, and we will continue to close unprofitable space.
Mr Fyfe did not rule out store closures or staff losses as the business grows online sales.
"We will continue to move this business forward in the direction we want to," he said."
Myer merger?
Bill Rooney, director of 6one5 Retail Consulting Group, said the deal could pave the way for a merger of DJs and rival department store chain Myer down the track.
"Strategically It always made sense to see if you can amalgamate David Jones and Myer together," Mr Rooney said.
Myer's largest shareholder would no doubt be watching WHL's sale of DJs with interest, he said.
In April, it was reported Solomon Lew had spoken to WHL about taking David Jones off its hands.
Mr Lew has been a thorn in the side of WHL for more than two decades, ever since the South African group snatched control of Country Road.
Then in 2014, Solomon Lew ended up with a massive windfall gain by forcing Woolworths to buy him out of Country Road at an exorbitant price in order to secure his support for the DJs purchase.
"So it'll be interesting to see what Anchorage are doing," Mr Rooney said.
"Is it is it a kind of like, you know, fix it up and then click it on the Solomon Lew, and then try and amalgamate that with Myer so I think there's a whole different play there.
"And I think you know, Solomon Lew is lurking in the background with a lot of interest in what's going on."
Mr Walker agrees.
"Potentially, we might even see a merger of some sort down the road."
"But right now I think Solomon [Lew] is just focusing on Myer, and seeing how all this plays out."
Anchorage's purchase of DJs is expected to be finalised in March.
“The Anchorage team will work closely with CEO Scott Fyfe and the talented David Jones management team on the next phase of its transformation," a spokesperson from the private equity firm said.
WHL 'might write a book one day' about its DJs disaster
In response to questions from WHL investors, the South African company's chief executive Ray Baggatini was asked why its plans for DJs did not succeed.
"It's disappointing, to say the least," Mr Baggatini said.
"And, you know, we've committed not to ever let that be the case, again.
"You can expect to see very different decisions around capital continue to be made going forward now.
"We might write a book one day, and then we'll be able to share that … It's been a bit of a business case for us, in terms of what not to potentially do, and how things happen with unintended consequences…
"But you know, we'd prefer not to really get into all of that now."
