Company Reports

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

JB Hi-Fi’s trading momentum keeps on improving—beating our prior expectations. Its Australian sales grew in the June 2024 quarter compared with the previous corresponding period. This is the first time Australian quarterly sales increased on the PCP since December 2022. On average, no-moat JB Hi-Fi is outperforming its peers. According to the Australian Bureau of Statistics, retailing sales of electrical and electronic goods declined by 1% in the June 2024 quarter. We calculate JB Hi-Fi’s Australian sales increased by 3%—a delta of 4 percentage points.

The upcoming August 2024 reporting season will draw the line under a difficult year for Australian retailers in which they navigated soft demand and soaring labor costs. The combination results in a profit margin crunch and declining earnings for many retailers.

Discounting has gripped the consumer electronics and household appliance retailing categories. Deflation in household appliances and consumer electronics indicates intense competition amid weak consumer demand. According to the Australian Bureau of Statistics, average prices of major and small household appliances decreased by 2% in the March quarter of 2024. We expect promotional activity to stay elevated and weigh on JB Hi-Fi’s sales and gross profit margins in the second half of fiscal 2024.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

No-moat JB Hi-Fi’s underlying sales momentum improved slightly despite the cost-of-living crunch. We raise our fair value estimate by 3% to AUD 37.50 per share due to the time value of money and a 12% lift to our fiscal 2024 earnings estimates. Our earnings forecasts from fiscal 2025 are virtually unchanged.

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We maintain our earnings forecasts and AUD 35.50 fair value estimate for no-moat JB Hi-Fi. First-half fiscal 2023 results had been effectively prereleased on Jan. 17, 2023, including 9% sales growth to AUD 5.3 billion and 14% EBIT growth to AUD 479 million. See our note published the same day: "JB Hi-Fi’s Strengthened Profit Margins Suggest Price Discounting Hasn’t Picked Up Yet."

No-moat JB Hi-Fi’s first-half fiscal 2023 earnings were stronger than we expected, underpinned by sales growth and greater operating margins. We increase our fiscal 2023 EPS estimate by 10%, but our longer-term earnings estimates are virtually unchanged from fiscal 2024 onward. The improved short-term earnings outlook together with the time value of money impact, drive a 3% lift in our fair value estimate to AUD 35.50 per share.

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

We maintain our earnings forecasts and AUD 30 per share fair value estimate for no-moat JB Hi-Fi following its first-half results. We maintain our AUD 2.43 per share dividend forecast for full-fiscal year 2021, equating to a 5% yield at current share prices. However, we forecast earnings to come off the pandemic-induced cyclical high and expect dividends to fall back to AUD 1.64 per share in fiscal 2022. Against our fair value estimate, shares in JB Hi-Fi screen as materially overvalued. The market is likely expecting sales and profits to remain at abnormally high levels for longer than we expect.

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

CEO Richard Murray reaffirmed fiscal 2015 revenue guidance of AUD 3.6 billion, which is in line with our forecasts, while acknowledging the market remains competitive. In August management reported a 5.5% decline in like-for-like sales for the month of July, reflecting a steep decline in digital tablet sales and weaker market conditions. Conditions improved in August and September with management reporting a fall in like-for-like sales of 2.1% for the first quarter of fiscal 2015. Despite weak like-for-like sales growth, we expect the opening of eight stores during the fiscal year, combined with the conversion of 26 existing stores to the larger JB Hi-Fi Home format, will ensure the company can deliver low single-digit revenue growth. This growth will help to fractionalise the operating costs as revenue growth grows at a faster rate than costs, to deliver earnings growth. We retain an underlying view that discretionary retail will remain weak while economic growth is low and household debt remains high. We make no change to our earnings forecasts or fair value estimate of AUD 12.00. This valuation is below the current share price and differs from the market because we expect the company will find it increasingly difficult to generate acceptable returns on capital as the stores portfolio reaches maturity.

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.

CEO Terry Smart surprised by announcing his retirement effective August 2014 after four years at the helm. His successor is the current CFO, Richard Murray. Smart's departure represents a loss of experience, especially given that he's been with the company since the management-led buyout in 2000. However, Richard Murray is well-credentialed, and experienced, having been CFO for more than 10 years. We don't expect major changes to the current strategy, given that Murray is an internal appointment, and has held a board seat since 2012.

After pre-releasing the first-half fiscal 2014 result last week, it comes as no surprise that net profit after tax, or NPAT, is up 10% to AUD 90.3 million. This result is in line with our expectations, and we make no material change to our fair value estimate of AUD 11.00. We consider the company as overvalued trading at a significant premium to our fair value estimate.

After the recent profit downgrades from Super Retail Group and The Reject Shop, JB Hi-Fi released a first-half trading update to reassure the market that, despite weakness from other retailers, it will report a 10% increase in net profit after tax, or NPAT, of AUD 90.3 million. This is in line with our expectations and we make no material change to our fair value estimate of AUD 11.00, pending more details from management, which will be released at the first-half result. At this result, scheduled for the 3 February, management will discuss details surrounding market conditions which will enable us to get a more informed sense of the company's operating environment. We do not view the company as having a sustainable competitive advantage or economic moat and that, over time, its returns will become increasingly competed against by other market entrants. We consider the company as overvalued, with the share price trading above our fair value estimate.