Australia's David Jones faces tougher Myer competitor

MELBOURNE, March 14 (Reuters) - Australian upscale retailer David Jones Ltd. faces a tougher competitor following the sale of the Myer department stores, whose new owners are mostly tipped to move the chain slightly upmarket. Coles Myer Ltd. on Monday sold its underperforming 60-store Myer chain for A$1.4 billion ($1 billion) to a consortium led by private equity firms Newbridge Capital and Texas Pacific Group, and also including the Myer family.

Myer has struggled to find a winning position in the retail market, where it has tended to sit between David Jones and Target, a discount chain owned by Coles Myer.

Analysts, on the whole, said Texas Pacific's overseas retailing experience suggests it will more likely take Myer upmarket than down.

"They're going to go slightly upmarket, I think, but I don't think they'll do anything drastic straight away," F.W. Holst & Co. analyst David Spry said. "Clearly, David Jones will have a formidable competitor as time goes on."

Shares in David Jones jumped 15 percent to record highs after the firm raised its first-half profit growth forecast on Feb. 22 to 15 percent from 5 percent, despite a slip in second-quarter sales amid a weak consumer spending environment.

But the shares have dipped in reaction to the Myer sale, falling more than 2 percent on Monday and another 1 percent by mid-afternoon on Tuesday.

Texas Pacific was part of a consortium that bought British department store Debenhams in 2003 for 1.72 billion pounds ($2.96 billion). Debenhams last November posted a doubling of its annual pre-tax profit, and there is speculation it could be refloated on the London stock market this year.

Texas Pacific was also last year part of a successful bid for U.S. upscale department store chain Neiman Marcus.

TRACK RECORD

ABN Amro Asset Management investment analyst Matthew Hoult said the buyer's track record suggested it would not simply focus on stripping out costs from Myer.

"These guys do appear to have runs on the board for actually building businesses rather than just taking out what they can," he said. "But you would imagine, regardless, it's going to take a little while to turn the business around."

Hoult said the high price paid for Myer might help underpin the value of shares in David Jones, which has achieved stronger profit margins in recent years. Myer's EBIT (earnings before interest and tax) margin was 1.3 percent last fiscal year versus a David Jones department stores margin of 4.1 percent.

Shaw Stockbroking analyst Scott Marshall said David Jones had carved out a successful niche, but its ability to expand could be affected by a refocused Myer.

"David Jones always was trapped by its target demographic, and it would just restrict it a little bit more," he said.

But UBS said in a research report there was a risk that Myer's new owners could reposition the chain to compete more directly with Target.

"(They) could also seek to expand the level of sales from private label products. Under this scenario, we believe Myer may shift positioning further away from David Jones and more towards Target," the brokerage wrote. ($1=A$1.37) ($1=0.58 pounds)

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