JB Hi-Fi Sales Strong But Concerns Linger

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

-Tight cost control
-Risk to margins from FX
-HOME ramp up slower
 

By Eva Brocklehurst

JB Hi-Fi ((JBH)) flagged strong January trading and affirmed sales guidance but viewpoints differ as to the rest of FY15. The first half results were solid and given downgrades to guidance from other retailers, a relief, but brokers have some lingering concerns about the outlook. 

Morgans liked the tight cost control which minimised the impact of softer sales. The key downside risk is softer gross profit margins from FX-driven inflation. The broker would review its rating on evidence that stronger pricing is passing through in key categories, given consumers are very likely to mount resistance to anticipated FX-driven price increases. Like-for-like momentum is expected to remain solid, amid the maturing of the new Home category. The broker attributes the delay in expected outcomes in this segment to labour reductions in store, as the company has targeted its rosters to make savings. The Home category is expected to take time to bed down, as the entry into white goods is a significant development for the JB Hi-Fi brand.

Simply meeting expectations in the current retail environment should be considered a positive, in Macquarie's view. The broker gives credit to management for its focus on the potential longer term in the Home category. Management has admitted it was too bullish at the start and that store maturity in HOME is taking longer than expected. Other positive factors underpinning Macquarie's Outperform rating include lower fuel prices and the potential for reductions to the Reserve Bank's cash rate that are priced into futures markets by July 2015. This is expected to more than offset the headwinds emanating from a weaker Australian dollar.

JP Morgan is disappointed with the Home segment, with the current earnings contribution appearing to be around break even. The broker accepts the sales trend is improving but is concerned about the outlook for margins. The company has managed costs well but these are expected to build. All up, JP Morgan wants to witness more progress on costs and an improvement in the performance of HOME. Deutsche Bank is also subdued in its outlook, while noting the balance sheet is robust and guidance is better than expected. Still, the Home concept, while not a failure, remains of concern given the sales conversions are not occurring as fast as anticipated.

Stronger cash flow and trading in January provided reasons for optimism but Morgan Stanley is still not completely convinced, given the delays with HOME. Of note, there were no significant product launches in the period and this means the strong performance reflects the importance of back-to-school sales and the increased significance of IT in education. The broker also observes the company quashed expectations of capital management in FY15, so investors are unlikely to benefit from improved cash flow in the near term.

Citi remains the most bearish on the FNArena database with a Sell rating. The broker considers sales visibility is low, with guidance implying 4.0% comparable store growth in the second half. Moreover, this seems to be based on the January sales outcome. Citi points out that, in the past, January sales have not provided a reliable guide to overall growth in the second half. The broker expects sales to be slow over the next three years because of a limited number of new products in the pipeline and more competition.

First half profit was down 2.0% and 2.0% below UBS' forecasts. Still, the broker took away some positives including the improving trends, as the second quarter like-for-like result was up 1.3% year on year and January was very strong. Cash flow was aided, in part, by timing but also improvements in inventory. The FY15 profit guidance of $127-131m is in line with the broker's expectations. UBS expects the stock to outperform over the next year as earnings momentum builds with scale in the Home category. The broker expects an easing Australian dollar will bring back some inflation and reduce the attractiveness of offshore online sales. In terms of capital management, UBS believes this is probable in FY16.

Calls still diverge on the database since the stock was last covered at the AGM update, although, overall, they have become a little less bullish. There are two Buy ratings, five Hold and one Sell. Targets range from $15.40 to $19.40 and the consensus is $17.57, suggesting 3.1% upside to the last share price. This compares with a consensus of $17.69 ahead of the result. The dividend yield on FY15 and FY16 forecasts is 5.1% and 5.3% respectively.
 

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