JB Hi-Fi's Result In Line, While July Sales Take a Step Down

JB Hi-Fi delivered a 10% increase in fiscal 2014 net profit after tax, or NPAT, to AUD 128.4 million, with revenue up 5% to AUD 3.5 billion. The result is in-line with our forecasts. The Company plans to open a further eight new stores in fiscal 2015 and covert 26 stores into the broader JB Hi-Fi Home store concept, selling a larger range of products for the home. This will take the portfolio to 177 stores with 52 positioned in the larger big box Home format. We expect this move into a broader market for technology and white goods combined with growing the commercial business will help to extend revenue growth for the next three years and help to offset the natural rise in operating costs. However, our fair value estimate is significantly lower than the market and this centres on our longer term view of the business. We expect increased competition for branded consumer goods from larger retail groups, here, offshore and from online will fragment the market, making it increasingly difficult for the company to grow comparable revenue. We expect this will lead to operating deleveraging, when costs associated with labour and leases rise at a faster rate than revenue, causing a contraction in profit. After updating our financials for fiscal 2014 and accounting for the time value of money our fair value estimate increases from AUD 11.00 to AUD 12.00. This is significantly below the current share price, which in our view is not anticipating the company being impacted by operating deleveraging over the long-term.We do not view the company as having a sustainable competitive advantage or economic moat. Over time, we believe returns will become increasingly competed against by new market entrants. The dependency on discretionary retail expenditure ensures the company will deliver volatile returns determined by macro-economic conditions and view the fair value uncertainty as high.