Against the winds, JB flies high
JB Hi-Fi's brave strategy of expanding its store network amid harsh retail conditions is still working. But while the outlook for this year is even better, Dick Smith and other dangers lurk nearby.
Where others have been either shrinking their store networks, or at least slowing previously planned rates of growth in the face of difficult retail conditions and the continuing shift of sales online, JB Hi-Fi has kept opening new stores and focusing on protecting its sales base even though that has impacted its profit margins and its returns on capital.
The latest half was no exception, with 11 new stores opened (and three smaller stores closed). Four of its co-located JB Hi-Fi and Clive Anthonys stores were also merged and repositioned under the new JB Hi-Fi Home brand the group is experimenting with as it contemplates entering the home appliances market.
What that helped produce was a 3.1 per cent increase in sales within the JB Hi-Fi branded stores in Australasia but a 3.5 per cent decline in comparable stores sales. In its Australian JB H-Fi stores it generated 3.6 per cent sales growth but experienced a 3.4 per cent fall in comparable stores sales.
JB Hi-Fi is good at execution and it was able to improve its gross margin on the higher volumes in that Australian store network, by 25 basis points, although its EBIT (earnings before interest and tax) margin was down by 4 basis points to 7.05 per cent. Net profit was up a creditable, in the context of the broader retail environment, 3 per cent.
There is no doubt that external conditions have been difficult for retailers and for electronics retailers in particular. JB Hi-Fi’s categories have experienced the general consumer conservatism and focus on value, their particular vulnerability to the growth of online retailers and the disruptive consolidation of the sector.
Last year saw not only the demise of several electronics retailers and the withdrawal of the big department stores from much of the sector but the very disruptive restructuring of the Dick Smith chain as Woolworths brutally restructured it in preparation for its eventual sale to the private equity turnaround specialist, Anchorage Capital. Woolworths effectively paid Anchorage to take the chain off its hands so that it could exit electronics. The Australian dollar’s strength and the competitive intensity of the sector also helped force strong price deflation.
While there’s no doubt that online penetration of some of JB Hi-Fi’s key segments is increasing – its own online sales were up 40.3 per cent in the half and now represent about 2 per cent of its total sales base – it is unclear whether the consolidation of the sector last year, and the Dick Smith sale in particular, will provide stronger industry settings.
JB Hi-Fi itself seems to think conditions will be more stable in the second half, with comparable stores sales for the full year down about 3 per cent and gross margin holding at the rate achieved in the first half. In January it experienced positive comparable stores sales growth of 4.2 per cent, and total sales growth of 11.7 per cent, while improving its gross margin.
Much of the outlook could hinge on the retail strategies pursued by Anchorage, which has hired former Myer high-flyer Nick Abboud as Dick Smith’s chief executive and brought former Myer chairman and senior Woolworths executive Bill Wavish in to provide advice as a non-executive. If they pursue a price-driven strategy Dick Smith could continue to be a disruptive force; if they are more focused on margin the sector might be more stable.
An interesting aspect of the JB Hi-Fi result was its disclosure that the "visual", or television, category’s sales were down 11.1 per cent in total and 17.9 per cent on a comparable stores basis. It believes the market is shifting into a "replacement" cycle and that volumes will stabilise at the lower levels.
Other ‘’hardware’’ sales (products like computers, cameras and telecommunications devices) fared better, with total sales up 11.5 per cent per cent and comparable stores sales up 4 per cent.
It will be interesting to see how Harvey Norman, which was battered by the conditions last year and which isn’t as enthusiastic as JB Hi-Fi about its potential to create a meaningful online presence, has fared.
Its model, with its big portfolio of large stand-alone company owned stores and extensive reliance on (and the need to support) its franchisees has been severely tested by the difficult conditions of the past couple of years.
It’s not going to make Gerry Harvey any happier that JB Hi-Fi is encouraged by its experiment with the brand extension into whitegoods, saying that there had been good growth from appliance categories and results were currently ahead of its own expectations.
A more competitive Dick Smith in electronics and a broader JB Hi-Fi expansion into appliances and whitegoods would add to the pressures on his own business, although they might also force further rationalisation and consolidation at the smaller end of the sector and eventually more stable conditions for the larger survivors.
There have been some modest and inconclusive signs of some stabilisation of conditions in retailing generally and certainly JB Hi-Fi’s January experience and its expectations for the second half might, if borne out by its experience, suggest the sector has at least bottomed. No one, of course, is expecting any really meaningful improvement in the climate for retail any time soon.
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