Australia | Oct 13 2011
– JB Hi-Fi AGM offers sales update
– Group sales higher, like-for-like sales down
– Tough macro outlook impacting on earnings
– Brokers remain broadly positive on the stock
By Chris Shaw
At its annual general meeting yesterday JB Hi-Fi ((JBH)) indicated like-for-like sales for the first quarter of FY12 were down 3.5% in year-on-year terms, broadly in line with the fall of 3.3% recorded in July. Sales overall rose 6.6% for the quarter.
In the view of UBS the sales result reflected ongoing price deflation in Audio Visual products, promotional activity in IT products and softer Telco sales ahead of the launch of iPhone 4S. As the result was broadly in line with its expectations UBS has made no changes to forecasts, viewing the 1Q12 result as solid given the current macro backdrop.
JP Morgan was a little more negative on the update, indicating it was weaker than had been forecast. Even factoring in the cycling of a less demanding second quarter of FY11, the update has caused the broker to trim its like-for-like sales growth forecasts for 1H12 to minus 2.5%, down from minus 1.1% previously.
The changes to sales growth expectations impact on earnings, with JP Morgan cutting its earnings estimates by 2-6% through FY14. This reflects the view that even allowing for the cycling of easier comparable numbers, there remains downside risk to earnings from the weak discretionary retail environment.
The 1Q12 sales result was also weaker than Macquarie had expected, though the broker has not adjusted earnings estimates as a result. This reflects the fact any shortfall can be made up, as Christmas trading generates about two-thirds of first half revenue for JB Hi-Fi. Management remains confident the interim result will still be solid given new iPhone, movie, music and game releases.
Looking beyond the short-term, Goldman Sachs continues to expect solid earnings growth in coming years thanks to the combination of new store openings, the maturation of the existing store network and ongoing product category management.
With respect to the store rollout program, Citi expects a further 14 new stores will commence trading in FY12, 10 of these by Christmas. Citi notes management remain confident they can secure 13-15 new sites annually.
For Goldman Sachs, earnings growth expectations of 12% in earnings per share (EPS) terms for FY12 remains achievable, as a buyback of shares in May of this year will deliver about 4% of this growth. With group sales growth of around 8% expected for the full year, there is no requirement for margin expansion during the period.
A possible driver of some earnings growth is the pending launch of JB Hi-Fi's web-based music platform, JB Hi-Fi NOW. Citi estimates this service has the potential to add $5-$10 million to group sales in the first 12 months of operations.
JP Morgan remains more cautious on earnings, suggesting consensus net profit forecasts for JB Hi-Fi of a result of around $137.5 million for FY12 are a little high given the risks posed by weak trading conditions.
JP Morgan's profit forecast of $134.3 million implies EPS of 133c, rising to 144.7c in FY13. This compares to consensus EPS estimates according to the FNArena database of 138.3c and 155c respectively. Goldman Sachs is not in the database but forecasts EPS of 139.2c for FY12 and 151.8c for FY13.
No ratings have changed post JB Hi-FI's AGM, the database showing six Buy ratings and two Hold recommendations. Goldman Sachs also rates the stock as a Hold. The consensus price target according to the FNArena database stands at $18.00, while Goldman Sachs has set its target at $17.49.
Shares in JB Hi-Fi today are stronger and as at 11.25am the stock was up 44c at $14.80. This compares to a range over the past year of $13.35 to $20.50, the current share price implying upside of about 21% to the consensus price target in the FNArena database.
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