Subdued Start To FY15 For JB Hi-Fi

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

-Soft July numbers influence outlook
-Improvement expected in second half
-But will new products stimulate demand?
 

By Eva Brocklehurst

JB Hi-Fi ((JBH)) did not deliver the sales momentum brokers hoped for as FY14 came to an end and the outlook for FY15 is disappointing. The best features of the electronics retailer's results were the dividend, which increased, and the targeted pay-out ratio, raised to 65% from 60%.

2015 will be a year when the company only inches forward, in Credit Suisse's view. The outlook is affected by the cyclical slowing in household income while guidance is heavily influenced by July's subdued performance. From a trend perspective the profit impact of the company's venture into housing products, HOME, only becomes material beyond FY15. The next positive catalyst for Credit Suisse is unlikely until after Christmas, when the peak season's trading conditions are known. JP Morgan is confident the company's broader trajectory can remain positive and that earnings growth will recover in FY16. The company remains better positioned compared to other mid cap discretionary retailers, with no exposure to weather risk and improving electronics industry trends, as well as a lesser impact from a lower Australian dollar. The broker is confident that gross margin expansion can continue and costs can be well managed.

UBS believes the company is in for low growth but not no growth. Still, the stock is likely to underperform until management delivers positive like-for-like sales growth or undertakes capital management over and above neutralising the employee option scheme. Growth is expected to return in the second half as consumer spending recovers, easier comparatives are cycled and the HOME segment gains scale. Hence, UBS maintains a Buy rating and awaits the AGM trading update in October.

CIMB lowers FY15 profit forecasts by 7% and its rating to Hold from Add. July may be the low point of the year but the challenges beyond abound. New categories in commercial lines and appliances should offset the impact of the declining categories such as software and tablets but the broker suspects, as recent history suggests, underlying operating cash flow has been sacrificed. Capex will also increase in coming years to support the roll out of HOME. The broker observes the strong FY14 gross profit margin partly reflected a decision not to participate in higher industry clearance activity in June. It seems the company missed out on sales and the broker questions whether the margins are sustainable.

July's like-for-like sales fell 5.5% on the prior July, attributed to a decline in tablet sales, but Macquarie expects this weakness to be confined to the first half. The broker considers it too early to extrapolate July trading to the full year, and new technology due out later in the year should stimulate an improved performance. Macquarie maintains an Outperform rating, factoring in leverage to an eventual recovery in consumer spending and increased exposure to stronger residential construction activity via the HOME business. The company is focused on capital management and the lift in the pay-out ratio is an encouraging development, as the broker notes the company will again buy back stock to offset the diluting impact of shares which have been issued.

A more cautious consumer attitude is expected to prevail and this is why BA-Merrill Lynch downgrades forecasts for FY15. The broker was not surprised by the guidance for sales growth of 3.4%, given persistent headwinds from the post-budget deterioration in sentiment. Nevertheless, the company is confident enough to guide to sales growth and that fact, for the broker, is an indication of the strength of JB Hi-Fi's initiatives. Merrills expects double digit earnings growth can be achieved if any improvement in market conditions eventuates.

Citi dispenses with hope, not expecting any respite in the declining sales trend until 2015 at the earliest. Citi questions guidance for sales growth, because there is a lack of significant product innovation to stimulate demand. The broker is bearish on tablet prices, and other categories as well. Any revamp of the iPhone or sales of large screen TVs will not be enough to restore growth. The broker believes the store's electronics inventory consists of too many outdated technologies and expects weaker sales of tablets, laptops and cameras to continue. Moreover, HOME is becoming more expensive to roll out. Citi notes capex has gone up and the pressure to achieve more than $3m in HOME sales per store is high. Also, productivity needs to compensate for narrow aisles and limited service. In the end, success will be determined by gross margins in FY15 and the broker expects another 15 basis points on top of the 17 basis points achieved in FY14. Citi retains a Sell rating.

FNArena's database contains four Buy ratings, three Hold and one Sell. Targets range from $15.10 (Citi) to $21.00 (Merrills). The consensus target of $18.99 suggests 7.3% upside to the last share price and compares with $20.22 ahead of the results. The dividend yield on FY15 and FY16 forecasts is 4.9% and 5.2% respectively.
 

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