For five years the electronics business within David Jones has been an earnings anchor looking for an axe. The department store group won’t say how heavy it is, but getting out of the category that includes audiovisual and televisions and tablets is expected to deliver a full financial year benefit of up to $10 million.
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It is a category that David Jones boss Paul Zahra would probably have pulled out of before now, but simply ditching these products is not simple. In the first instance there is floor space (generally in isolated corners) that would need to be filled and there is inventory on the floor that would be subject to painful discounts.

The deal announced on Monday under which Dick Smith will operate as an electronics concession for David Jones seems like a pretty nifty solution.

(A concession is a store within a store. David Jones provides the real estate and Dick Smith does just about everything else including supplying the product and the staff.)

The department store gets a set percentage of sales, which Dick Smith underwrites up to a certain, unspecified, amount.

Dick Smith gets a couple of things out of this deal. It bulks up sales and gets a better cost price from suppliers, and it probably gets a good deal on the floor space rental.

It also gets a boost in sales – an outcome that works well for a group now owned by private equity but which will be looking to float on the stock exchange within the next five years (coincidentally this covers the length of the deal with David Jones).

Both parties get the additional foot traffic and David Jones customers are provided with new products, such as mobile phones.

David Jones will remain in whitegoods and small electricals because they still make money. But in the broader electronics area the specialists and online suppliers have taken market share and drained the earnings from general merchandise outlets. Even the bricks-and-mortar electronics category killers have found life tough.

JB Hi-Fi, for example, reported on Monday that sales in its visual category fell almost 12 per cent in the year to June 30 on a same-store basis, while software sales declined about 9 per cent. Myer has been phasing out some of its electronics products.

Being first cab off the reporting rank means JB Hi-Fi is a bellwether for how the sector is travelling. It’s still a pretty ugly picture out there in discretionary retail despite the numerous interest rate cuts.

JB Hi-Fi’s 2013 sales numbers look fairly good at first blush. Total sales for the year were up 5.8 per cent and the second-half sales were a more robust 10.3 per cent higher. But these numbers are a bit distorted. The second half of last year (the six months to June 2012) was a tough period across the retail board. So the gains are (in part) the result of comparing oranges and last year’s really rotten oranges.

Investors who follow retail know this. They were looking for optimistic sales guidance for 2014. But JB Hi-Fi management was not obliging.

Store numbers are set to increase 6 per cent over this period and management forecasts sales will improve by 6 to 8 per cent. This equates to only moderate improvement in same-stores sales growth.

Chief executive Terry Smart called it ”tough and competitive out there” on several occasions during the investor call even though the worst of the deep price discounting seems to have passed.

Analysts were wary that Smart was being overly conservative and like many managers he is loath to disappoint. But there is no suggestion that it is back to the future for retail. Rather, the excessive discounting has passed, replaced by just ”discounting”, which paves the way for gross margin to continue to improve.

JB Hi-Fi’s low-cost, low-price model is well suited to the current retail environment where the discount operators are generally faring better. In the longer term, its mix of products leaves it vulnerable to online competition.

It was an early mover in developing its online store, which has been growing rapidly. Having said this, Smart says growth rates are starting to come down.

The company is also moving its offer by opening and converting some traditional stores to the HOME concept.

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Illustration: John SpoonerNational Australia Bank’s $1000 cash-back offer to induce home owners to switch their mortgages to the bank has a touch of the Demtels about it, with the short-term offer including everything but the steak knives.
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It seems competition is intensifying in home lending just in time for the federal election. The banks are hardly novices when it comes to understanding the whims of politicians and what better time for some obvious competitive price tension than during an election campaign.

NAB’s collection of inducements – including $1000, a discount on its mortgage protection insurance, a $600 waiver on its application fee and no monthly fees on its transaction account – follows Westpac’s decision last week to reduce its standard variable mortgage rates by more than the official rate cut by the Reserve Bank, a move that would have been unheard of a year ago, when the big four banks were either ignoring the RBA or offering smaller cuts.

Westpac’s variable rates are still higher than its peers but it is closing the gap. It isn’t surprising, given the latest Australian Prudential Regulation Authority figures show Westpac’s share of the mortgage market shrunk 0.7 per cent in the past year.

Westpac has taken the reverse approach to NAB in recent times. It has been happy to lose market share and retain a higher margin on its home loan product. One of the benefits of this approach is that it could increase the amount of its funding from deposits without paying quite as much as NAB.

While NAB and Westpac might have had different approaches in relation to mortgages, group revenue growth has been much the same. And from Westpac’s perspective, its approach has significantly improved its funding position with a smaller capital impost.

The fact that Westpac’s approach seems to have produced a better outcome leaves observers wondering how long it can keep its mortgage rate higher than its peers. The bank would argue that the higher rate will remain because it has superior service.

This may be true but while credit growth is low, there isn’t much to lose by growing less than market. The crunch will come when credit growth picks up, but that could be some time away if Monday’s figures are anything to go by. The June finance figures show while total new lending jumped for the fifth consecutive month in June – up 6.9 per cent to $59.8 billion – housing finance was up 2.1 per cent, which is flat considering the number of times the RBA has taken the axe to official interest rates.

NAB’s strategy of leading on price has been one of its boss Cameron Clyne’s prouder strategic accomplishments as he has sought to stem the tide of customer dissatisfaction that was a feature of his predecessor’s tenure.

But has leading on price actually been successful? Clyne would argue that it has and that there were precious few alternatives for him to consider: the brand was suffering and he had to do something.

The numbers cast doubt on the success of this strategy. NAB’s total revenue growth is not greater than its peers and its funding position has been increasingly challenged as the cut-price home lending strategy has led to higher loan growth and a greater need for deposits. All this has come at a time when its peers are also seeking to grow their deposits.

One of the outcomes is that NAB now has the lowest net interest margin in its peer group. This was not the case a few years ago. To put it into perspective, NAB’s margin is barely 2 per cent compared with ANZ at 2.24 per cent, CBA at 2.1 per cent and Westpac at 2.19 per cent.

Yes the bank’s struggling UK business has contributed to this position but wind back the clock a few years and NAB’s margin was higher than CBA and Westpac’s.

NAB’s ”More Give Mortgages” campaign was launched on Monday and the quick reaction of all the banks to cut interest rates last week epitomises the flat credit growth and income growth the banks are facing as the economy slows and unemployment rises.

The rule of thumb is the higher unemployment, the bigger the problem for bad and doubtful debts. To date, bad and doubtful debts and impairments have not been a problem for the banks but if the economy turns sour, this will change.

The new impaired assets remain at more than $1 billion a month for the big four banks combined. This compares with less than $400 million a month in 2007, before the effects of the GFC.

There are so many reasons for investors to be keen to drill down into Commonwealth Bank’s results on Wednesday and pay close attention to the outlook statements from its chief executive, Ian Narev. Credit growth and bad debts will determine his ability to keep his EPS growth going in the right direction as well as keep his dividends increasing.

CBA is trading at a hefty 14 times price-to-earnings multiple but still has an enticing 5 per cent dividend yield. When cash rates are 2.5 per cent and bank deposits are paying little more, the appeal of CBA continues as long as its profits and dividends are safe. And that’s the question facing all banks.

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Commonwealth Bank chief executive Ian Narev does not lie awake at night worrying about how the property market might respond to record-low interest rates, despite persistent questions about house prices from foreign investors.
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The chief of the country’s biggest bank said on Monday he thought the economy was suffering from low confidence, and it was important that the election produced a clear winner.

He also said he thought there would probably be one more 0.25 percentage point cut in the cash rate, after the Reserve last week cut the benchmark rate to a 53-year low of 2.5 per cent.

While some experts are debating the potential for cheap debt to sow the seeds of a housing bubble, Mr Narev said he had confidence in the judgment of Reserve governor Glenn Stevens and the board.

”I am absolutely confident that all direct and indirect consequences for the property market that may flow from a change in interest rates are absolutely thought through by the governor and his board,” he said at a conference in Sydney.

”I do not lose a moment’s sleep thinking about that. They think very carefully about a range of issues, they are absolutely aware of what effects different interest rate settings might have on the economy and I’ve got a lot of confidence that they … have a good perspective about that.”

Mr Narev said foreign investors ”always” wanted to talk about Australian house prices, but ”stress tests” had found the bank would survive a severe housing downturn with price falls of up to 40 per cent.

The comments came amid fresh signs of banks competing to sell home loans, with NAB offering $1000 cash payments to customers who refinanced with the lender.

Aussie Home Loans also slashed rates on two-year fixed mortgages to 4.64 per cent, a move it said was facilitated by funding from CBA, which owns 80 per cent of the mortgage business.

After the sharp falls in interest rates, some analysts and industry insiders say there is a debate to be had on risks of a housing bubble.

Real estate agent John McGrath, speaking on the same panel, said the recent pace of price growth in some areas was fast and probably not sustainable over the long term.

Money markets have priced in one more rate cut of 0.25 percentage points, and Mr Narev said he thought this was about right. He also said the economy was affected by low confidence, and it was important that whoever won the election had a clear majority.

”We love the fact that we’re so dependent on Australia as an economy … but in the short term there are some confidence challenges, and we’ve all got to be aware of those,” he said.

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Despite the retail downturn, JB Hi-Fi has posted its first profit growth in three years. Photo: Glenn HuntStrong and sustained sales momentum that took hold after Christmas has helped JB Hi-Fi defy the general downturn across the retail sector to post its first full-year profit growth in three years.
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The raised profit, up 11.2 per cent to $116.4 million, was held back slightly by lower comparable sales in New Zealand and a jump in the cost of doing business, namely higher wages bills driven by Fair Work Australia award increases as well as fatter rent bills.

The full-year performance, built on a 5.8 per cent lift in sales to $3.308 billion, surpassed analysts’ expectations and the market rewarded the retailer, sending its shares more than 4 per cent higher, before closing up 60¢, or 3.2 per cent, at $19.12 – a 27-month high.

There was also good news in the outlook statement for investors, with a pick-up in sales that hit JB Hi-Fi stores in January pushing into the new financial year, with sales growth for July touching 8 per cent and like-for-like growth up 2.2 per cent.

JB Hi-Fi said a new pipeline of products and gadgets, such as TVs and gaming consoles, should continue to drive interest and growth in the wider electronics market, with the retailer now tipping sales for fiscal 2014 to rise by between 6 per cent and 8 per cent on the previous year.

The positive growth comes at a time when most retailers are suffering an earnings downturn as consumers refuse to spend.

The electronics and home entertainment group was the first large retailer to report full-year earnings, but not all are expected to surprise the market on the upside.

Deutsche Bank analyst Michael Simotas said the positive outlook statement implied better 2014 financial year sales than the market was expecting, although with the stock performing well recently he believed this was largely in the price at current levels.

”Sales were slightly ahead of our expectations due to higher contribution from new stores, gross margin was in line, but cost of doing business was higher,” he said.

JB Hi-Fi declared a final dividend of 22¢ a share, fully franked, taking total dividends for the year to 72¢.

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The clash between Melbourne Victory and Greek side Olympiakos in May last year was supposed to be a friendly soccer match but relations between some of those involved in the fixture appear decidedly hostile.
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Not only was Victory flogged 4-1, it appears to have taken a bath off-field as well. Last week the club filed a lawsuit in the Victorian Supreme Court, seeking to have SEQ Global, the Australian arm of sports financier SEQ, wound up for failing to pay it $116,000.

Victory claims SEQ agreed to guarantee the payment of the money by the event’s promoter, John Denison, who didn’t cough up. For those who aren’t down with the lizanguage of the strizeets, Denison was one of the promoters behind failed hip-hop festival Supafest, which collapsed owing $2 million after rappers P. Diddy and Missy Elliott failed to appear at last year’s event.

J-Den is also a former business associate of corporate crook ”Rocket” Rodney Adler, who in the dayz of wayback funded failed Denison venture Smash Music.

Denison told CBD he had ”nothing to do with the box office” money collected after the Victory-Olympiakos match.

”I was just the promoter,” he said. ”All the funds were received by SEQ, they were to distribute them accordingly.”

He seemed unfazed by the flap.

”I’ve been sued for a long time, I’m an expert at this,” he said.

CBD called SEQ’s Sydney office and emailed director Stephen Duval, but has yet to hear back.Cape out of range

Has Cape Range devised a fool-proof strategy for making sure numbers fall favourably at its special meeting of shareholders this week, or has it just forgotten to pay the phone bill?

The meeting will consider a reverse takeover by coal technology group Exogen and issuing shares to previous directors who say they are owed money.

However, shareholders who have attempted to lodge their proxies have discovered that Cape Range’s fax number doesn’t work.

What about the phone? No luck there either. The number given on Cape Range’s ASX page appears to have been disconnected.

All very unhelpful when the meeting is on Thursday – by the time you read this article, the window for lodging proxies will have closed.Minority upset

Minority shareholders at ASX-listed, but Bermuda-registered, Miclyn Express Offshore are again upset with the behaviour of majority owners CHAMP and Headland Capital Partners, who between them own 75 per cent.

The private equity groups were able to take control of the mining shipping services outfit because it’s subject to Bermudian law, which offers far fewer protections to minority investors including BT, property development veteran Bill Bowness’ Wilbow Group and the Myer family’s OC Funds Management. On Monday, Wilbow CEO Michael Herskope wrote to CHAMP and Headland, complaining that no new independent directors had been appointed since the last two resigned at a torrid shareholder meeting in June.

Herskope also asked for reassurance that the PE pair would tell the ASX of any good news on the earnings front, even if it caused the share price to rise, contrary to their interests. Of course they will.Garrett test drive

Spotted in the Volkswagen dealership on Sydney’s North Shore, Monday arvo: Midnight Oil member, outgoing MP for Kingsford Smith and former education minister Peter Garrett. The chrome-domed superstar took a test drive, perhaps looking for a little post-politics diesel and dust.

However, it seems the jaunt was just blue sky mining, as he didn’t buy. Maybe VW’s shiny new bugs just aren’t as rock’n’roll as a dirty old Kombi van.

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