Amplifying JB Hi-Fi

In the clamorous world of retailing, Richard Uechtritz plays a different tune: this low-key, courteous entrepreneur might have been a biochemist or a heart surgeon. The JB Hi-Fi head office is in an unmarked building in the comfortable Melbourne suburb of Gardenvale. Don't expect to see Uechtritz on late night television jumping over sofas or performing stunts to sell his wares.

But all that hardly matters to investors who have backed Uechtrtiz and his home entertainment chain from the day JB Hi-Fi floated at $1.55 in 2003. Even before he developed JB HI-Fi, Uechtritz had his fans at the top of town who had watched him build and later sell his Rabbit Photo chain in the 1990s. For those early investors the fact Uechtritz had built a national retail business in the photo industry was enough to back his stewardship of JB Hi-Fi. (He sold the Rabbit Photo chain to the photography company, Hanimex).

When Uechtritz first joined JB Hi-Fi in July 2000 it was a 10-store operation turning over about $135 million a year; less than six years on it is close to a billion-dollar operation.

After Uechtritz took control of JB Hi-Fi in a management buy in (the name JB comes from a founder of the company, John Barbuto) he rolled in some weighty colleagues from Macquarie Bank to float the company: Patrick Elliot of Next Capital (formerly of Macquarie Bank) remains chairman. Today at a stock price of about $4.25, giving market capitalisation of $446 million, JB Hi Fi is trading on a price/earnings multiple of about 21. .

More than anything else, Uechtritz comes across as a first-class retailing strategist; he created a blueprint for the JB Hi-Fi stores, in which each store has a sort of mock corner-store atmosphere, with prices written in chalk on blackboards and the stores looking like industry warehouses populated with eager staff who tend to be genuinely interested in what they are selling.

The stores are also small by retailing standards: just 1,300 square metres against, say, 4000 square metres at rivals such as Harvey Norman. Consequently, the roll out of new stores, the essential investment proposal put forward by this stock at the start of 2006, is easier to manage and should be achieved much faster than similar plans for stores that might have taken more space.

Moreover, Uechtritz does not see JB Hi-Fi as an endgame; he has wider plans to develop his Clive Anthonys electrical subisiary in Queensland into a high-growth busines once JB reaches a maturity, in about three years. Eureka Report caught up with Uechtritz just as the retailing sector may be lifting from the mire of 2005, a possible revival heralded by industry leader Harvey Norman reporting better-than-expected results for the December quarter.

JB HI-FI DOES IT AGAIN
	2004	2005	2006 (e)	2007 (e)
Sales ($m)	452	694	874	1,053
Net Profit ($m)	13.80	21.20	26.70	34.10
Yield ($m)	2.05	2.05	2.28	2.99
Franking (%)	100	100	100	100
PER (relative to All Ordinaries)	1.2	1.2	1.1	0.9

James Kirby: The first thing you might do is explain to Eureka Report subscribers the nature of this listed home entertainment business?

Richard Uechtritz: Well, roughly 50% of sales would be hardware, which is DVD players and items of that nature; another 35% is software and that would include CDs and DVDs; and 8% is car audio. Then separately there is the Clive Anthonys subsidiary in Queensland. In total, the group will turn over almost $1 billion this year. Clive Anthonys, which specialises in electrical goods, will do about $100 million.

What's your background?

I led the management buy in of JB Hi-Fi back in July 2000. That was basically a Macquarie Bank, Bank Boston-funded management buy in five-and-a-half years ago.

After the buy in you did an initial public offering (IPO). How did that go?

We did the IPO on October 23, 2003. The Capital Group is our largest shareholder with about 10% of the stock; there's also a group of substantial shareholders with about 5% and that includes my own shareholding.

So, here we are two years later and the stock has been travelling very well in a difficult market for retailers. Now in your most recent results, for 2004-05, you had a 50% improvement in profits and a 53% lift in revenue. Moreover, stockbrokers suggest you'll have 25% earnings per share growth each year to 2008. Are you comfortable with that forecast?

They’re all within the ballpark of each other and we’re comfortable with those forecasts. The way to look at this company is that we’re only halfway through our rollout and basically we feel we can untimately have 100 stores, give or take a few, compared to 54 JB stores now .

You say you’re halfway through; so when will you finish the rollout?

Subject to availability, if we can do about 15 to 20 stores a year, it’s going to take about three years and we’ll be there.

The striking figure at JB Hi-Fi is its very solid sales margins of 5%. What's the driver there?

I think it’s just a combination of the type of industries we’re in and because we have a low-price policy and have the biggest range of whatever we stock, and we tend to have a high turnover in the stores. They are unique stores.

Would it be fair to call JB Hi-Fi a category killer?
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It’s correct, I suppose. There’s a few companies you’d sort of put in that sector. Obviously, Harvey Norman in computers and you’ve got Bunnings in hardware and, of course, in home entertainment you’ve got us. There’s no one that has a complete hardware/software offering as we do in home entertainment.

How do you deal with price deflation, where prices are actually dropping in many key products such as televisions. It seems to be the big problem in this sector. Do you think it’s anywhere near hitting the floor?

Well, yeah, it has to. In some items such as laptops, prices were coming down sharply; now it’s sort of levelling off.

I expect that as a consumer retail company you must be very exposed to consumer spending patterns, which are still sluggish.

Obviously we’ll do better if consumer expenditure grows. However, I think we’re in a market where we sell a lot of "feel good" products that people can always justify because when you look at everything around us, inflation is low, interest rates are low, unemployment’s low, consumer sentiment’s not too bad (albeit they don’t seem to be spending at the moment).

But every retailer could describe their wares as "feel good" products. What's different here?

You can justify it because you won’t go and buy a new fridge, washing machine or dishwasher until it dies; whereas you look at those plasma televisions or LCD televisions and some of the surround sound systems and you feel like you’re missing out because you don’t have it.

Second, a lot of our business is the software that goes into those things so it’s the DVDs and the CDs and the games, and you don’t think too much about purchasing those. They feel good to purchase but they’re not big expenditure items.

I've seen you quoted suggesting the new music devices that allow people to pirate or copy music is good for your business. I find that hard to believe. How do you explain that notion?

Well put it this way. People have been saying that about the CD market for a long time. I’ve been involved in the business for five-and-a-half years and comparable store sales have grown every year. Obviously the market has shrunk somewhat, but JB has grown and the only difference between the market and JB is that we’re more exposed to the back catalogue market (of older material). We’re the only player in that market and there’s a lot of sales.

At your current price of about $4.25 and a price/earnings multiple of 21 times, the majority of brokers have you as a buying opporunity. But why should long-term investors look at this stock?

Because we’re in a big growth phase. We are halfway through our roll out, we’ve rolled out eight stores in Sydney in the past few months so we’ve got that growth. As we grow we’re getting better purchasing power from suppliers. We are in the top three in most categories we sell.

Are your sales people commission-based?

They are. All the sales people are commission-based and the managers are paid a good package as well as a bonus.

And you don't own any property?

That's right. We don’t. We rent all our stores.

So, it's a company very much pared down to exploit this continuing growth in sales revenue. Now explain Clive Anthonys, your electrical retailer subsidiary. Why do you have such a subsidiary in the first place? I would have thought you were busy enough with JB Hi-Fi?

Clive Anthonys represents 10% of revenue at the moment. It has six stores. That business is a great little business covering the full electrical category. Not dissimilar to Harvey Norman without the furniture.

While we have the expansion in JB Hi-Fi, obviously a lot of the focus and the human resources and the cash resources will go into expanding JB Hi Fi because that’s clearly the stronger model. However, when that sort of tends to '¦ you know '¦ reach maturity, we can turn around. The good thing about JB Hi Fi, unlike other retailers in the past like such as Miller's Group '” great company and all of a sudden, where are we going to go now?

I expect the problems at Miller's Group (whose assets were recently acquired by a private equity company) was an instructive story for you.

Yes, absolutely, and so was Brashs, if you remember them. The Brashs business was a great browngoods business, which is basically TVs and audio and cameras. It was a great sort of browngoods business and music business. Remember, they were the biggest music retailer and they then decided to sell computers and then they said, 'Let’s sell whitegoods', and then they said, 'Let’s sell air-conditioning', and then they were all over the place. (Brashs eventually went into receivership.)

The good thing about the Clive Anthonys business is that they're in in the electrical business, as we are at JB Hi-Fi. Obviously, it has cooking and whitegoods and air-conditioning. In reality, it’s our market. We deal with the Panasonics and we deal with the Hitachis and LGs and Samsung.

As the JB brand name reaches maturity, we’ll put a lot more focus of expanding the Clive Anthony's business, so we've got one hell of a lot of expansion left in Australia over the next 10 years. There's 200 Harvey Norman stores and 70 Good Guys stores and 200 Retravision stores, so our Clive Anthonys business '¦ you know: pick a number where we could be with that.