Questions remain over David Jones CEO Zahra’s hasty exit

Questions remain over Zahra’s hasty exit

October 23, 2013

Elizabeth Knight

The stage-managed and neatly packaged explanation of Paul Zahra’s impending departure from the top job at David Jones doesn’t pass the smell test. Six weeks ago Zahra told me over lunch, ”I couldn’t imagine myself doing anything else because I love the company”. Either Zahra’s next job is in acting or he did not envisage this week’s chief executive ”transition”. My money is on the latter. He made similar press comments a week later after he spoke with me. ”We have done a lot but there is still more to do,” he said. Chief executive’s don’t side-swipe investors with a decision like this if they are in control of the timing. Under normal circumstances they (and the board) prepare investors and analysts rather than issuing shock announcements. It was abundantly clear from talking with investors and reading the reports from investment bank retail analysts (both of which are generally plugged in) that Zahra’s news came as a surprise.To conclude that he was sacked by the board is probably a stretch but to surmise that he decided to leave after some kind of conversation with David Jones chairman, Peter Mason, about his medium-term support as chief executive is more likely. It’s probably also a fair bet that Mason and his board don’t have another candidate in mind.

Having watched many chief executive transitions and how they are variously sold to investors and the media, the ”I need a break” is a departure from the usual script.

Chief executives – even ones like Zahra who were thrust into the job due to unforseen circumstances – don’t generally throw up their hands after three years in order to take an extensive vacation.

Mason is a seasoned director and chairman but if he (as I reckon) withdrew wholehearted support for Zahra, he has failed in his task of managing succession. There is no one inside David Jones that is ready to fill Zahra’s shoes and no obvious outside replacements.

Former Oroton boss Sally Macdonald, who is potentially in contention when her no-compete handcuffs are removed next February, is the only obvious candidate but I doubt whether she has already been lined up. Mason has also misjudged the support Zahra has garnered over the past year for his strategy, central to which was putting David Jones’ digital offer on steroids and ridding the department store of the chronic sales discounting.

Comments from investors were pretty consistent on Tuesday in support of Zahra and his plan for reviving David Jones. They were generally positive about the full-year 2013 earnings result that was ahead of most expectations.

Over the past three years David Jones has reported consistent falls in revenue and share price and is only now looking at the prospect of earnings growth. The decision is all the more curious because Zahra has only recently being credited for the potential reversal in fortune and he was awarded 88 per cent of his short-term incentive payment, indicating the board was comfortable with his performance. For the first couple of years he operated in the shadow of his predecessor, Mark McInnes, whose departure was the result of his behaviour rather than his performance.

Zahra struggled to convince the market that he had the capability to reshape David Jones into a 21st-century retailer.

The other strange element to this week’s announcement was the timing, only a few months off the vital Christmas trading period.

The notes from analysts on Tuesday reflected the understandable sentiment. Credit Suisse noted that the retailer generates approximately 45 per cent (estimated) of annual profit in its second quarter. The sudden resignation of the CEO increases operational risk through this period. It noted that there is now potential for strategic change: including the move to create a new small format, a move to the recently signed concession agreement with Dick Smith Electronics for the sale of consumer electronics products within David Jones stores.

Credit Suisse, along with others, take the view that the online initiatives seem strategically sound, as do the commitment to investment in point-of-sale infrastructure and the move into private label sales.

JPMorgan is one of many that points to the disruption that the announcement of a new CEO will create. ”This announcement is a surprise given progress on the future strategic direction plan, according to Citi’s Craig Woolford, who described Zahra’s move as strange in its timing.

The David Jones share price fell almost 3 per cent in response to the news on a day when the market was up overall.

 

‘Burnt out’, David Jones chief quits

October 22, 2013

Eli Greenblat

 

Upmarket department store David Jones is searching for its third chief executive in as many years after Paul Zahra caught investors by surprise in announcing his desire to step down after fighting the worst retail conditions in decades and designing a new online sales platform from scratch.

Shares in David Jones plunged this morning in reaction to yesterday afternoon’s shock announcement. Shares were down 7 cents, or 2.5 per cent, at $2.78 in early trade.

Mr Zahra’s planned exit from the top job comes as arch-rival department store owner Myer is also looking for a chief executive to replace its outgoing boss Bernie Brookes, with the two retailers expected to spark a bidding war for successors.

Already, market speculation has centred on the highly respected former boss of fashion and accessories retailer Oroton, Sally Macdonald, who departed the retailer in August and has publicly stated her desire to take on a new management role at a retailer.

Ms Macdonald, considered one of the best retailers in the country, revived the fortunes of Oroton after seven years in the chief role and could be well placed to take the next step up the retail food chain and run a fully fledged department store responsible for thousands of brands.

However, investors on Monday night were concerned that management salaries, which have been kept tight since the global financial crisis, could break out if David Jones and Myer engage in a bidding war for Ms Macdonald’s services.

Mr Brookes is set to depart Myer next year, with the board having already searched for a replacement for a number of years.

Outgoing David Jones boss Mr Zahra told BusinessDay last night he was ”simply tired” after leading the upmarket department store chain through some of the toughest retail conditions in recent history, and is looking forward to travelling, rest and new challenges.

”I think 3½ years in the department store is a long time, and if you think about our restructuring post the global financial crisis, us not being ready for the digital world – it has taken its toll and I’m just simply tired.”

He said he will step down as soon as a successor is found.

Mr Zahra, who has been at David Jones in a number of executive roles over the past 15 years and was appointed chief executive in 2010 following the shock sacking of former boss Mark McInnes over sexual harassment allegations, said it was time for him to prepare for his departure from the retailer.

”I’ve got to the point where I have been with David Jones for 15 years, I’ve celebrated the company’s 175th year, I have transformed the company into an omnichannel retailer.”

The way in which he got the job, in the wake of the scandal around Mr McInnes and the massive slide in retail trading conditions, made his job much harder and had come at a cost.

”In my mind, I have figured the past 3½ years as a CEO, they weren’t normal, let’s face it,” he said. ”It was tough going, and I am signalling my intention to resign, not resigning today, and this allows the market to go through a process to find the right candidate.

”Remembering how I fell into the job, I wouldn’t want anyone to go through the same process.”

Mr Zahra said after a successor was found he was looking forward to a holiday with his partner.

”We have a bucket list of travel locations that we would like to go to.”

The department store said in a statement to the ASX Mr Zahra was leaving for ”personal reasons”.

David Jones said a succession process had begun that would involve an extensive national and international search.

David Jones chairman Peter Mason said Mr Zahra had taken on the chief executive role at the upmarket department store at a difficult time for the company and that he would leave the retailer in a solid financial position.

Fund managers contacted by BusinessDay said they were surprised and puzzled by the announcement that Mr Zahra had decided to leave the company as soon as a successor was found to steer the department store.

”It is surprising and I didn’t expect it,” said Allan Gray chief executive Simon Marais.

”I don’t really know. It’s surprising. I don’t think things have been going terribly [at David Jones], it’s actually been going really well, but it’s too early to know at this stage really.”

Mr Marais, whose firm manages $3.6 billion in Australia and holds a 7 per cent stake in David Jones, said he had spoken to the company’s chairman on Monday night and was assured there was nothing else around Mr Zahra’s decision that he needed to know about.

Morningstar Equities analyst Tim Montague-Jones said the shock announcement would add investment uncertainty around David Jones. ”I guess what it does is add a bit of uncertainty to the organisation …”

 

Departing DJs boss scorns rumours

October 22, 2013

 

Elizabeth Knight

The announcement of Paul Zahra’s intended departure from the top job at David Jones was accompanied by a swirl of unsubstantiated rumours about internal tensions involving group executive for merchandise Donna Player.

The genesis of the retail tug-of-war story could be traced to one of David Jones’ suppliers – but it is a story that Zahra vehemently and credibly disputes. He describes himself as very close to Player, whom he recruited from Woolworths last year – a story that is verified by David Jones insiders, including Player herself.

In the bitchy and incestuous world of fashion the (fictional) story is said to have been concocted by a high-profile supplier who was once exclusively distributed by David Jones but now also sells in Myer.

In a formal announcement, David Jones said Zahra had given notice to resign for personal reasons and would remain until a replacement had been found. It said it could be some time before an international search was completed.

Zahra appeared relaxed and happy in the job when interviewed last month by Fairfax Media, commenting there was still much to be done in the premium department store group.

When asked at that time about his future in the role, he said he would continue while he was having a good time. ”I haven’t seen all the good times yet,” he said.

Only a few days ago, he was flying the David Jones flag at the Caulfield Cup race carnival.

He said on Monday he was happy to stay until the board found a replacement. The announcement had been made because headhunter Korn/Ferry (whose chief executive Katie Lahey is a former David Jones director) had been approached.

Since taking the position three years ago as a result of the removal of his predecessor Mark McInnes over a sexual harassment scandal, Zahra has been struggling under difficult business conditions to revive the company’s fortunes.

Over the past six months, his retail strategy has been gaining traction and major shareholders have become increasingly supportive of his digital omni-channel investment, which is set to become profitable over the next 12 months.

Zahra said on Monday he thought he had completed most of the ”heavy lifting”.

David Jones chairman Peter Mason said: ”Paul will leave David Jones in a solid financial position and I thank him for his contribution as CEO. I look forward to working with Paul to ensure a smooth transition of his role to his successor.”

However, some shareholders have expressed disappointment that Zahra is leaving the company and said they did not believe any of the remaining management had the qualifications to take the top job.

Zahra’s departure will leave both the upmarket department store chains looking for chief executives as Myer boss Bernie Brookes has already announced he will retire in August 2014.

While there will be an international search for a new David Jones chief executive, names that were thrown up include recently departed Oroton chief executive Sally Macdonald, Kmart boss Guy Russo and former head of merchandise for David Jones Collette Garnsey.

 

Riding the retail revolution

September 28, 2013

Elizabeth Knight

In June 2010 Paul Zahra was parachuted into the top job at David Jones – a month later this newbie conducted his first major media interview. It was a lunch format and, for him, virgin territory. He was nervous but delightfully unrehearsed, careful but unusually candid.

Three years on, Zahra is a different beast. He is experienced – the personal and professional toll that the media and investment markets exact on business leaders, and recognises the need to be ”on message” regardless of the social lunch setting.

Today’s lunch starts well. I notice his iPhone wallpaper shot – a self-portrait with his scruffy Norwich terrier, Compass, perched on his lap helping him read David Jones board papers.

It’s a personal side that in 2010 he may not have been comfortable to have on display.

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His birth into the premier management position at David Jones was premature. His predecessor Mark McInnes had been as close to a ”rock-star executive” as there was in Australia. News of the sex scandal that dislodged McInnes went viral. While newspaper and TV outlets were pursuing McInnes around six-star Thai health retreats during his immediate self-imposed exile, Zahra was back at David Jones headquarters dealing with a board in post-traumatic shock, worrying about brand damage.

In the inner circle of the retail industry, Zahra was well known but to the outside world, the man now in the limelight was Paul who?

Zahra’s was a baptism of fire.

Turn the clock forward three years and the fire should have been well and truly doused by now. But with the wisdom of hindsight the McInnes drama was a walk in the park.

The tectonic plates in the retail industry had been shifting while McInnes and his predecessor, Peter Wilkinson, had been at David Jones, but it was when Zahra arrived that people really woke up to the potential threat of digital as a ”disrupter” to bricks and mortar retailers.

The tipping point for digital recognition was the broader economy. In 2010, the global financial crisis had spawned a new, more anxious consumer – one who did not want to spend and for whom reducing household debt was the rapidly emerging fashion. The discretionary dollar was dwindling and consumers were deserting shops in droves.

Zahra called this cyclical-structural pincer the perfect storm. ”The macro settings were not good for department stores, and not good for a department store that hadn’t prepared itself for the new digital world,” he said.

Today the David Jones challenge that Zahra contemplates as we sit in Sydney’s fashionable Felix eatery, in the central business district, supping on beef cheek and chargrilled pork neck, is an existential one.

Brand Zahra is now well known – eyes and chatter are directed our way and a high-profile newspaper gossip columnist wanders over to pay his respects and mine the table for any conversational crumbs.

The new public face of David Jones might be model-ambassador Jessica Gomes, but in a corporate sense it is Zahra who carries the company’s success or failure on his shoulders.

Over a glass of 2011 Chateau Riotor Cotes de Provence rose´, he offers some insight into the intensity of the task. ”If I knew what I was stepping into, would I have taken the job? Absolutely not. But I am glad I took the job because it’s been the most amazing journey I have had, and I couldn’t imagine myself doing anything else … It’s been three years, but not three normal years … I’ve never actually experienced what a normal fiscal year would be like … it feels like double that time frame. It feels like I’ve done 10 years of work in 10 months.”

Unsurprisingly, he does not believe that the premium Australian department stores are past their use-by-date but is the first to admit that the sector is challenged.

Department stores, he tells me, started off being based in towns, moved to regional, state and then national businesses.

Thanks to the digital age, ”they are now becoming international”: ”People mischaracterise the competitive battle as being between David Jones and Myer. It’s actually David Jones versus the world.”

The new power base in the evolving digital era is the consumer, who gets to choose what dress to buy, what story to read, and what house to buy and where to access a mortgage from the vast array of digital offerings.

How can Zahra be so convinced there is a future for department stores when offerings are now available through channels accessible from a laptop to a mobile phone, and often for a better price? Why do we, as consumers, need bricks and mortar stores imposed between us and the brand manufacturer/designer?

”I have a strong vision to be a style destination and a customer experience. Someone has to play the editing role, otherwise you are lost in the worldwide web. We are human beings and we want interaction. Shopping is still tactile,” he says.

The new lexicon for traditional businesses that are fighting back – be it retail, newspapers or cable television – is about being the sieve in an avalanche of choice: the editor or the curator.

He reminds me that the large department stores in the US, that are ahead of Australia in the digital space, still book 90 per cent of their sales in-store.

But Zahra, impeccably yet conservatively dressed in a dark suit complete with a houndstooth handkerchief tucked in his jacket pocket, is not a flat-earther.

These days he is a zealot about the department store’s omni-channel future – one which, he confides, will ultimately lead to fewer David Jones stores with smaller footprints. Stores will digitally recognise customers as they walk in through Wi-Fi, and tell them about a new range from their favourite designer. Already the recently installed point of sale systems at the counter will locate, display and transact items not in-store.

While his head swims with the introduction of David Jones’ digital plans, he is still a bloke who has presided over mostly negative quarterly sales for a couple of years. He knows his challenge is how to lift revenue without sacrificing profit. Historians will judge him on whether he can execute a retail revolution that will reinstate the relevance of premium department stores in Australia, and harvest a new customer rather than rely on the older generation of loyalists.

The introduction of national Chinese debit/credit card UnionPay is one plank, the transfer of home electronics to a Dick Smith concession is another.

The full-year result that David Jones just released suggests he has hit on one element of the success formulas – cutting consumers’ addiction to almost continuous ”sales events”.

It’s a good result, born of Zahra’s strategy to manage the levers that are within his control.

Three years ago the response to slowing sales – from almost all traditional retailers – was slashing prices.

Today, David Jones cannot afford to boost sales this way. It runs a relatively high-cost model and cannot discount its way to success. Nor, he tells me, can it keep its international suppliers happy if their brand is being subjected to chronic discounting.

The bricks and mortar retailers, David Jones among them, have been busy bringing prices down to a closer facsimile to their international online rivals. It is called harmonisation, but it is still a work in progress. Ask any online shopper and they will tell you there is a way to go yet. While Zahra ponders whether today’s new retail environment is the ”new norm”, he yearns for a return to the days when the consumer had longer arms and shorter pockets.

But consumer confidence is an emotional thing that economists find increasingly difficult to predict. Lower interest rates have not yet provided the usual spending stimulus, and consumers have been slow to embrace the improvement to finances traditionally generated by improving share and house prices.

But for a significant part of the market (younger shoppers in particular), the genie is out of the bottle.

David Jones has placed its omnichannel offering on steroids over the past 18 months and is now getting plenty of traction. Fourth-quarter sales numbers have the company’s online store growing at more than 700 per cent.

David Jones is now on track to produce a profit from its online operations in the first full year of operation.

Three years has been a hard slog, and Zahra believes a chief executive’s role in the modern era of 24/7 communications is more extreme than it was even 15 years ago, and this accounts for tenure falling.

”The number of years [chief executives stay in the job] is coming down. You have to be physically and mentally up for the challenge. Even in the good times you are planning for the bad times.”

So how much longer is Zahra, 47, up for the challenge?

”I will continue while I’m having a good time. Like going to a party – you leave when you are having a good time.”

Life and times 

1966: Born in Melbourne to Maltese immigrants.

1982: Takes a part-time job at Target at the age of 16. Later joins his brothers in the family panel-beating business until accepting a management cadetship at Target.

1994: Meets Mark McInnes and Stephen Goddard while at Officeworks after working widely across Coles Myer group.

1998: David Jones brings in McInnes and Goddard as new brooms and Zahra joins the troika as general manager of merchandise.

1999: Zahra starts four-year stint running DJs cosmetics counters – a key business for store branding.

2003: McInnes appointed DJs chief executive. He installs Zahra as general manager of stores with responsibility for 36 shops and 8000 staff.

2010: Appointed David Jones chief executive after McInnes’ resignation amid sexual harassment complaints by former employee Kristy Fraser-Kirk.