Australia | Feb 14 2012
– JB Hi-Fi meets revised earnings guidance
– Tough retail environment posing challenges
– Broker opinion on stock remains divided
By Chris Shaw
In a trading update in December JB Hi-Fi ((JBH)) guided to interim earnings before interest and tax of around $120 million and yesterday the company delivered a result right in line with this guidance. Interim profit came in at $120.7 million, the result reflecting a fall in like-for-like sales for the period of 3.1%.
The result was worse for mature stores, where like-for-like sales fell by 6.5%. As Credit Suisse notes, this was due to ongoing margin pressure, slow underlying top line growth and cost growth of 3-4% per year.
Costs are of increasing importance to JB Hi-Fi in the view of RBS Australia, as the broker suggests there is now little opportunity for any further lowering of the cost of doing business going forward. Given the fixed nature of major expenses, further weakening in turnover is likely to generate additional contraction in operating margins according to RBS.
This is because sales and marketing expenses appear to be at a base level of around 9% of sales, while occupancy costs are unlikely to come down further as landlords more than likely avoid offering any rent relief.
With consumers appearing to be suffering from some promotional fatigue post the Christmas period, JB Hi-Fi has revised FY12 sales guidance to a gain of 5.0%. This is slightly disappointing, as for example JP Morgan had been forecasting growth of 6.3% and median forecasts were around the 6.5% mark.
In JP Morgan's view JB Hi-Fi now faces a number of external challenges, as not only is the sales outlook in discretionary retail weak but there are the industry specific issues for consumer electronics retailers of price deflation and exposure to underperforming categories such as gaming, music and DVDs.
This won't help group margins, while JP Morgan is also cautious on the margin outlook for JB Hi-Fi given the company is maintaining its low price position despite ongoing discounting through the industry.
In such an environment JP Morgan takes the view earnings for JB Hi-Fi will remain under pressure, even allowing for positive company specific initiatives. To account for this the broker has trimmed earnings estimates by 1-6% through FY14 and in earnings per share (EPS) terms now expects outcomes of 118.2c in FY12 and 121.6c in FY13..
Others in the market have reacted similarly, RBS Australia trimming its EPS estimates by 2-6% for the same period and Macquarie by 4-7%. Consensus EPS estimates according to the FNArena database now stand at 120.8c and 126.9c for FY12 and FY13 respectively.
Post JB Hi-FI's interim result there have been some changes to broker ratings, with Credit Suisse downgrading to an Underperform recommendation from Neutral previously and Macquarie lifting its rating to Outperform from Neutral.
For Macquarie the upgrade is a valuation call, as relative to a price target of $15.96 JB Hi-Fi offers a total 12-month shareholder return of nearly 40%. This includes a dividend yield of better than 6%, fully franked.
RBS Australia agrees JB Hi-Fi remains a Buy, as the stock is the best of the discretionary retail plays in the Australian market in the broker's view. This is due to both quality of operations and management and the potential for the company to benefit from any further consolidation in the market.
But JP Morgan and now Credit Suisse disagree, both rating the stock as the equivalent of a Sell. For the former the recommendation is a reflection of the view the share price is simply unlikely to outperform while the operating environment for JB Hi-Fi remains such a challenge.
Credit Suisse offers similar reasoning, arguing the current environment is unlikely to deliver a consistent uplift in discretionary spending generally, while there are also medium-term risks to store profitability from margin pressures. For Credit Suisse this suggests market earnings estimates for JB Hi-Fi through FY15 have further to fall.
Overall the FNArena database shows JB Hi-Fi is rated as Buy twice, Sell twice and Hold four times. The consensus price target is $13.01, down from $15.53 prior to the result. Targets cover a wide range, from Macquarie at $15.96 to Credit Suisse at $10.85.
Shares in JB Hi-Fi today are slightly weaker and as at 1.45pm the stock was 4c lower at $11.99. Over the past year the stock has traded in a range of $11.10 to $20.50. The current share price implies upside of around 8.5% relative to the consensus price target in the FNArena database.
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