JB Hi-Fi Does It Again

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

Once again, JB Hi-Fi has beaten forecasts. But is it just too expensive?

-JB Hi-Fi’s result exceeds forecasts, again
-A special dividend excites shareholders
-Brokers acknowledge a sensible acquisition
-Valuation a stumbling block

By Greg Peel

Oh JB, you’ve done it again.

That about sums up the response from analysts to electronic retailer JB Hi-Fi’s ((JBH)) FY24 result. And its FY25 to-date trading update. And an acquisition. And a special dividend.

To say that JB Hi-Fi has a habit of beating expectations through the thick and thin of economic cycles would be a gross understatement. For many years hedge funds lined up to short the stock, believing its run of success could not be sustainable. Bridge Street is littered with their corpses.

Cost of living crisis? Well, the company did post a -16.4% reduction in profit year on year, and a -0.4% fall in total sales, along with a -15.8% drop in earnings, but the point is these results were at least 5% better than consensus forecasts.

Operating costs as a percentage of sales were up 74 basis points to 13.1%. This, too, was better than consensus. FY24 was really a function of better than expected cost management, particularly in JB Hi-Fi Australia. “JB Hi-Fi is the master of cost discipline,” notes Morgans, particularly in its ability to flex staffing costs in line with sales.

The company reported gross margins down just -42 bps to 22.2% despite a heavily promotional period, driven partly by sales mix as well as an increase in on-floor discounting. Management stated it believes promotional cadence had returned to more “normal”, pre-covid levels.

Promotional activity is key in a tougher consumer environment, says Morgans, and JB Hi-Fi continues to work with its suppliers to drive sales (implying suppliers are funding promotions). Morgans continues to see customers drawn to promotional events. This plays well for JB Hi-Fi given its reputation for value.

And momentum is only set to continue, it would appear, with sales for JB Hi-Fi Australia up 5.6% year on year in the first month of FY25, New Zealand up 12.2% and The Good Guys 2.7%. This despite July this year having only four weekends compared to last year’s five.

Capital Management

It is testament to JB Hi-Fi’s capacity to generate free cash flow that the company was able to execute an acquisition in the period (more on that in a minute) while still announcing an 80c special dividend on top of a 261c ordinary dividend which was itself, you guessed it, was ahead of expectation.

Analysts suggest it was the special dividend which drove a very positive share price response on Monday, despite what many perceive as an overstretched valuation.

Further capital management is likely in the future. Management suggested it would continue to monitor its capital position and evaluate further returns to shareholders, but did note some investment in inventory in FY25.

Citi now forecasts special dividends of 80c annually through to FY27.

The Acquisition

Brokers agree the acquisition of 75% of upmarket kitchen, bathroom and laundry appliance retailer E&S Trading (with an option to acquire the remaining 25% in 2029) is a good move. The company is currently based only in Victoria, with ten stores, and thus provides a platform for showroom rollout and category expansion.

Citi forecasts 35 showrooms across Australia by FY30. Similar to the acquisition of The Good Guys, the broker sees buying terms harmonisation driving some 200 basis points of gross margin expansion given many of the suppliers overlap both The Good Guys and E&S.

E&S may be modest in scale, notes Ord Minnett, but it provides entry into appliance segments that are currently dominated by rival Harvey Norman ((HVN)) at the premium end of the market. JB Hi-Fi’s historical adeptness in capital allocation, coupled with the retention of E&S management through FY29, underscores Ord Minnett’s endorsement of this strategic move.

E&S is a sound acquisition, suggests UBS, extending into an adjacent customer (commercial) and range (premium), yet this broker suggests interstate expansion is likely to take some time, noting modest brand awareness and some state-based supply arrangements.

The E&S acquisition diversifies JB Hi-Fi’s target customer base, notes Macquarie, opening up the premium whitegoods segment and B2B channel. It also presents integration benefits from improved sourcing and distribution costs.

Despite near-term risks due to the current softness in new building, this move offers medium-term growth opportunities and exposure to high-end brands. With JB Hi-Fi’s strong market position and strategic investments, including inventory management and store rollouts, the company is well-positioned for sustained growth and profitability, Macquarie believes, supported by macroeconomic tailwinds favouring discretionary retail consumption.

The Valuation Issue

Revenue growth opportunities driven through AI-enabled devices and the replacement cycle of early covid consumer purchases should underwrite demand in FY25-26, Macquarie suggests. Throw in this year’s stage three tax cuts, and next year’s (presumably) RBA rate cuts, and Macquarie remains positive on discretionary retail.

The broker sees consumer demand as continuing to improve over FY25, hence an Outperform rating with a target increase of 7% to $77.00.

JB Hi-Fi is the best performing retail stock under Citi’s coverage year to date. However, this broker believes investors are still underweight discretionary. Given this, and further earnings upside as the consumer recovery takes shape, Citi retains a Buy rating and raises its target price to $85.00 from $74.00.

Morgans expects JB Hi-Fi to outperform its peers during an economic slowdown, but the electronics category is discretionary and is inevitably subject to a contraction in demand. Morgans forecasts operating margins to remain above pre-pandemic levels, but cannot ignore risks to profitability if sales prove softer than the broker expects.

Hence, a Hold rating and target price of $69.00, up from $62.00.

The absence of a discernible trigger for a regression of operating margins to pre-pandemic levels further bolsters the outlook for the company, suggests Ord Minnett. JB Hi-Fi is trading near record highs but the superior operational performance and positive prospects in a surprisingly firm retail sector means this broker’s Sell recommendation can no longer be justified.

Ord Minnett thus upgrades its recommendation to Hold and lifts its target price to $68.00 from $51.00.

Morgan Stanley does not typically wax lyrical in its initial response to corporate results. The broker acknowledges AI-enabled devices are expected to provide future runway for growth, and an increase in the AI PC product range. Telco is also an opportunity, however, the timing is more uncertain.

Without clarification, Morgan Stanley retains an Underweight rating and a $54.70 target.

This leaves the six brokers monitored daily by FNArena and covering JB Hi-Fi evenly split on two Buy or equivalent ratings, two Hold and two Sell. The consensus target is $69.62, on a wide range from Morgan Stanley’s $54.70 to Citi on $85.00.

Jarden similarly has an issue with valuation.

JB Hi-Fi is one of the global leaders in consumer electronics, Jarden admits, and continues to execute well, through category innovation and cost control. But Jarden is of the view JB Hi-Fi shares are expensive on a relative basis with the company finding it increasingly challenging to take market share at a similar pace.

The company is already a top three player in telco and number one in AV/IT/appliances/games, with some 30% of the total electronics market in Australia. It faces competition from direct-to-consumer from the likes of Apple, Samsung, Dyson and others along with newer entrants such as Officeworks ((WES)). Supplier support will likely ease, in Jarden’s view, as competition lifts.

With that in mind, and trading at a five-year high PE multiple, Jarden retains Underweight, while lifting its target to $64.80 from $50.50.

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