Can JB Hi-Fi Maintain Its Strength?

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

JB Hi-Fi beat first half forecasts for sales and profit, but competitive pressures led to lower margins. Analysts have mixed views on the second half, and valuation.

-JB Hi-Fi beats forecasts (again)
-Competitive pressures weigh on margins
-Balance sheet strength supportive
-Valuation an issue

By Greg Peel

Australia’s largest home retailer JB Hi-Fi ((JBH)) posted yet another strong result for the first half FY25, with profit up 8% year on year and sales up 9.8% (8.1%) organic, both ahead of consensus forecasts. Compared to a year ago, sales growth was especially strong in the seasonally strong December quarter, and momentum flowed through into January.

JBH Australia’s 7.1% sales growth in January, along with 10% for JBH New Zealand (off a low base) and 5.9% for The Good Guys (TGG), defied concerns of a pull-forward of sales into Black Friday (or more correctly, Black Fortnight) and Boxing Day.

Cost of living pressures? What are we all buying?

There was a marked acceleration in sales across all divisions in the December quarter, notes Morgans, driven by strong demand for technology and consumer electronics along with well-executed promotional events. Some of the key growth categories included: Apple iPhones, TVs, AI-enabled computers, robotic vacuum cleaners, coffee appliances, personal care and cameras.

Sales momentum carried through into January, although management did caution the comparables get tougher in the second half.

Something had to give

A decline in gross profit margins across both JBH Australia (-17 bps) and TGG (-25 bps) was the only disappointment. Citi understands competitors are funding more discounting from their own gross margins on top of the usual supplier-funded discounts.

Management nevertheless called out a normalisation in the competitive environment, Macquarie notes, which had seen the level of on-floor discounting return to pre-covid levels. Along with product mix, this saw the “comparable” group gross margin decline -20bps year on year, Macquarie notes.

“Comparable” excludes the acquisition in September last year of kitchen/bathroom/laundry specialist E&S Trading (e&s), which operates in Victoria and the ACT.

Despite this, JB Hi-Fi maintained its “comparable” earnings margin at 7.5%. Given its track-record, Macquarie believes JB Hi-Fi will be able to offset cost of goods sold pressures by managing cost of doing business, although persistent competitive pressures may weigh on gross profits.

Management is taking a measured approach to new revenue opportunities (media & marketplace) with a clear focus on value. This was more pronounced than usual. Jarden highlights no less than 26 references to competition/discounting on the conference call, which is more than twice the average of the past ten result calls.

This was attributed to consumers actively seeking on-floor discounts and the likes of Officeworks ((WES)), Harvey Norman ((HVN)) and Amazon discounting more. This is likely to see further pressure on gross margins into second half, Jarden suggests, as JB H-Fi maintains its value position while growing market share.

Looking into the second half, management noted second half FY24 comparisons are stronger, and it will need to work hard to cycle the 22.4% gross profit margin in that half for JBH Australia. Consumers are still very promotional-focused, Goldman Sachs points out, so management will continue to focus on customer value and closing deals when customers are in-store.

On sales concentration around promotional periods, JB Hi-Fi noted it didn’t shift its promotional calendar and does not expect more promotions in remainder of this quarter (February/March), although February 2024 has 29 days versus 28 days in 2025 and hence it may promote more to offset.

What a difference a day makes.

On the cost of goods sold outlook in the face of a weaker Aussie dollar, management noted while the retailer procures only from local wholesalers in Aussie dollars, there is some discussion of price increases, albeit not executed on yet. If it happens, JB Hi-Fi will focus on protecting gross profit margin and the overall market will be met with similar cost of goods sold increases.

Capital Management

Macquarie is attracted to the flexibility permitted by JB H-Fi’s strong balance sheet, which remained in a net cash position of $555m as at the end of December. Noting cash is seasonally higher at end-December, the broker expects the company will remain net cash come the end of June this year.

Macquarie sees potential for capital management to be announced at the FY25 result as the group enters the seasonally cash-higher December quarter FY26 period.

Morgans also notes December is a seasonally high point for cash balances. However, compared to the same date last year, period-end net cash was up 14%, despite funding a net cash amount of -$41.0m in respect of the acquisition of e&s during the period. Morgans believes in the absence of further M&A, there is a possibility of another special dividend at the FY25 result in August, although it is not in the broker’s estimates.

Mixed Views

Macquarie continues to see positive catalysts for JB Hi-Fi, including cash rate cuts and improving consumer sentiment, balance sheet deployment and/or capital management, and consensus earnings revisions, supported by operational execution across key product categories and cost management.

Macquarie retains an Outperform rating, lifting its target price by 3% to $111.

Digging deeper, Citi remains bullish on the outlook for most electrical categories. Citi cites data indicating the value of PC shipments to the consumer channel rose 12% year on year in the December quarter. This should be reflected in retail level sales over the next quarter or so.

Moreover, robot vacuum app download data have tracked sales very well and show growth of 35% year on year into January. Despite likely only representing a small fraction of JB Hi-Fi’s sales, Citi thinks this kind of category growth could add up to some 1% of sales growth.

Citi expects competitive intensity to moderate somewhat given an improving consumer spending environment, which should result in less need for aggressive discounting. The company continues to grow market share despite these aggressive threats, suggesting peers’ price discounting may not be having the necessary cut-through.

Citi retains a Buy rating and $110 target.

JB Hi-Fi is the market leader in the consumer electronics and appliances sector, Morgans notes. It has a highly effective omni-channel model with a strong presence online complementing its extensive physical store network. Morgans expects JB Hi-Fi to continue to outperform its peers, forecasting operating margins to remain above pre-pandemic levels, but the broker cannot ignore risks to profitability if sales prove softer than expected.

Morgans has increased its target to $92 from $87, but sees the current valuation of 23x FY26 PE as too expensive, given JB Hi-Fi’s ten-year average is 14x. Hence a Hold recommendation.

Bell Potter continues to view JB Hi-Fi as one of the most productive retailers globally, with a leading revenue per square metre metric and operating margin, and well placed to grow from the AI upgrade cycle despite some near-term gross margin pressures.

However, Bell Potter thinks the current valuation is rich, with the near-term outlook for limited earnings upgrades already priced in. Bell Potter increases its target to $99 from $98 but downgrades to Hold from Buy.

JB Hi-Fi’s sales growth is reflective of a discerning yet robust customer choosing to spend in the company’s categories, UBS suggests.

JB Hi-Fi is operating in attractive categories which enjoy significant technology advancements (eg computers, mobile phones, televisions), have shorter replacement cycles (eg mobile phones 18-36 months) and are nearing a significant replacement cycle (eg computer replacement cycle 4 to 4.5 years). Market share gains, especially in mobile phone and more broadly across all categories are due to superior execution by management and its organisational structure.

These trends are expected to remain tailwinds for 2025 and beyond, but UBS retains Sell despite another result that has driven upgrades to earnings forecasts as earnings multiples are considered too elevated relative to history and peers, making the relative risk reward unattractive. UBS’ target rises to $90 from $72.

Morgan Stanley (Underweight) has published only brief updates to date, while Ord Minnett, which downgraded to Lighten from Hold in November, is yet to respond to the first half result.

Morgan Stanley retains a target of $69.20 and Ord Minnett sits at $71.00.

That leaves two Buy, two Hold and three Sell or equivalent ratings among brokers monitored daily by FNArena covering JB Hi-Fi. The consensus target is $91.74, but on a very wide range from $69.20 (Morgan Stanley) to $111 (Macquarie).

There are a number of reasons to be positive on the consumer and JB Hi-Fi is well placed to benefit, Jarden suggests a function of the replacement cycle, innovation and market share gains. However, this is a consensus view, Jarden notes, with the market assuming the company’s market share gains continue and competitive pressures ease.

While share gains will likely continue near term, Jarden sees the competitive backdrop as intensifying led by Amazon, Officeworks and direct-to-consumer. Against this backdrop, this broker sees risk/reward increasingly skewed to the downside, with earnings expectations having been lifted and comparables becoming more challenging as we move into 2025.

Jarden retains a Neutral rating, with a negative bias, reflecting concerns over competitive pressure and category maturation (telco and software) partially offset by the management strength and revenue opportunities in media. Jarden nevertheless lifts its target to $95.80 from $84.00.

Goldman Sachs has bucked the trend and dropped its target price, to $73.90 from $75.50. Citing the same elevated PE multiple issue as other brokers, Goldman retains Sell.

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