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JB Hi-Fi: How Resilient To Spending Slowdown?

Australia | Aug 18 2022

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

After delivering a strong full year result, JB Hi-Fi reported momentum carried into the first month of the new financial year, with sales slowdown expected to impact in the second half of the year.

-Robust consumer spending has supported a strong full year result for JB Hi-Fi
-Declining customer sentiment, rising costs and RBA rate hikes expected to impact in the year ahead
-Increased capital expenditure will support store network growth in New Zealand

By Danielle Austin

JB Hi-Fi ((JBH)) has benefitted from resilient consumer spending in the year past, with the company reporting FY22 sales growth of 3.5% to $9.23bn, and achieving net profit of $545m.

Supporting the result, demand for consumer electronics and home appliances remained elevated in the second half, driving 10% year-on-year sales growth in the half, and momentum appears to have carried into early FY23 according to initial July trading updates.

The second half did see some shifting trends however, influenced by covid lockdowns, with the company reporting an acceleration of sales as the year progressed — particularly once lockdowns ended — and a return to stores and subsequent slowing of online sales.

Market analysts noted a shift in consumer sentiment, to consider electronics more of a staple, benefits JB Hi-Fi, and will likely improve spending resilience in the category and reduce the company’s exposure to cyclical trends.

While the company improved gross margins across the board, up 36 basis points over the year, The Good Guys brand emerged ahead of the rest of the group with gross margin improvement of 89 basis points.

The cost of doing business increased for JB Hi-Fi, up 0.2% year-on-year to 11.6%, driven by increasing costs of labour and rent which look likely to continue to pressure earnings in the coming year. Consumers have so far accepted price increases implemented to offset cost increases, which have largely been delivered in the home appliance category.

Renewing its focus on JB Hi-Fi New Zealand, the company has committed to annual investment expenditure of -$5-10m over the next three years, with money being spent on store refreshes and network expansion.

Slowing of sales growth appears to be a case of when, not if, according to market analysts

Following the release of JB Hi-Fi’s full year results, all of FNArena’s database brokers have updated on the company, with three being equivalent Buy rated, two equivalent Hold rated, and one equivalent Sell rated. Between them, the six brokers have an average target price of $47.64, spanning $41.30-$53.56.

Noting a strong result in FY22, Macquarie (Underperform with a target price of $41.30) remains cautious on JB Hi-Fi’s outlook in the coming twelve months, expecting the discretionary spending segment will feel the full impact of rate increases and rising costs of staples in the coming year.

The broker is predicting a 5% increase in wage costs, which account for two thirds of the company’s cost of doing business, in the coming year. With the company lifting its inventory position 21% to $1.1bn, the Macquarie analysts noted concern around risk if consumer momentum isn’t retained moving into the peak retail season.

Macquarie is anticipating the company’s capital expenditure will increase to $64m in FY23 as it commits to investment in its New Zealand network, and anticipates three new store openings in the region annually. The broker has lifted its earnings per share forecasts 3.5%, 3.9% and 4.1% through to FY25, assuming improvement in gross margins and growth in New Zealand.

Citi (Buy with a target price of $50.00) finds the consensus forecasts for sales growth of 4% in the coming year to be pessimistic. On read-throughs from New Zealand’s retail sector sales, the Citi analysts note data suggest rate increases have so far had minimal impact on spending in the region, which supports the broker’s belief that JB Hi-Fi’s Australian performance will hold up better than the market is anticipating.

The broker does not find JB Hi-Fi’s $200m inventory lift to be of concern, anticipating the current inventory levels will support better sales during the upcoming key promotional days such as Black Friday and Boxing Day. Citi also anticipates inflation should continue to support a lack of volume increases, and notes the home appliance category is less cyclical than other retail segments.

While anticipating like-for-like sales growth will turn negative in the coming year, Morgans (Add with a target price of $50.00) expects the first half will be largely resilient. The broker is anticipating a gradual softening of demand, which will impact on gross margins, and a return to normalised promotional and discounting activity, but that increased selling prices will provide some buffer to margins.

Morgans expects if the company delivers an earnings beat it will be due to a return to promotional and negotiating activity, and notes JB Hi-Fi does have a recent history of over-delivering on margins which could be a positive for the company’s outlook. Morgans lowered its earnings per share forecasts -1% and -2% in FY23 and FY24 respectively.

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