JB Hi-Fi turns up the amp and enjoys the music

Over the past few years, in a retail sector under pressure from weak demand and structural change, JB Hi-Fi kept faith in its expansionist business model even when it was adversely impacting on margins and returns.

Operating in the sector most affected by disruptive change and within which other electronics retailers were being squeezed from the market, JB Hi-Fi’s Terry Smart held his nerve, continuing to expand his store network and focusing on protecting his sales base and improving the detail of his business. Indeed, he also began a careful expansion into anther distressed retail segment: whitegoods.

One of the factors contributing to the pressure within electronics – apart from the deflation generated by the higher dollar and intense competition – was the demise of several retailers and the large-scale restructuring of the Dick Smith chain after Woolworths sold it to private equity firm Anchorage Capital, exiting the sector.

Since Anchorage acquired the Dick Smith business at a fire-sale price (originally $20 million, and a profit share that was cashed out last month for another $74 million), the sector appears to have behaved quite rationally. The destabilising and unsustainable discounting that previously characterised it appears to have abated, although the market remains intensely competitive.

The benefits of JB Hi-Fi’s own brave strategy and the more stable sector settings were reflected in the results Smart unveiled today. Comparable store sales, which had gone backwards to the tune of 3.5 per cent in the first half, rebounded in the second by 3.2 per cent.

Smart’s commitment to maintaining his overall sales base and continued new store openings was shown in the 5.8 per cent growth in total sales (6.3 per cent in the Australian business), while a 43 basis point improvement in gross margin on that bigger sales base translated to an 11.2 per cent increase in earnings.

Electronics is one of the retail categories most impacted by the growth of online retailers, but JB Hi-Fi’s ‘bricks and clicks’ strategy appears to be quite advanced, with online sales up almost 29 per cent. At $65.9 million, that’s about two per cent of its overall sales.

JB Hi-Fi has been experimenting with home appliances, which it believes is a $4.6 billion-a-year market. It converted eight stores to its JB Hi-Fi Home concept last year and says early sales results had been positive and had no negative impact on its existing categories.

It now plans to convert another 10 existing stores this financial year and says there is potential for about 50 of the ‘Home’ stores over the next three years, which would represent a serious assault on Gerry Harvey’s turf.

With incremental sales per store estimated at $3 million in the first year and $5 million in the second, the concept also represents a meaningful growth opportunity for the group.

Even as JB Hi-Fi was issuing its results – which were greeted very positively by the sharemarket – David Jones was confirming reports that it has struck an exclusive deal with Dick Smith, under which Dick Smith will operate the David Jones’ electronics business. In effect, Dick Smith will be operating a concession within David Jones’ stores, albeit under the David Jones brand.

Apart from being an interesting and quite creative arrangement in its own right, the deal is also a sign of the level of confidence Anchorage has in the business that it should shift so relatively quickly into expansion mode.

Former long-time Myer executive Nick Abboud has made it clear he has quite an ambitious store-opening program in mind. It effectively emulates the JB Hi-Fi strategy of emphasising top-line growth as the key driver of the business, and also reverses Woolworths’ handling of Dick Smith’s deterioration, which saw large-scale store closures and consequently relinquished sales.

With the more distressed electronics retailers now gone from the market and Dick Smith acting rationally under its new ownership and management, the environment within which JB Hi-Fi operates is a more stable one, even if conditions for retailers generally remain difficult. Its commitment to opening new stores and expanding into new segments adds a growth tinge to a model that has proven quite resilient.

With sales growth of 8 per cent in July (2.2 per cent on a comparable stores basis) and its own growth program, JB Hi-Fi is quite confident of its top-line outlook for this financial year and so provided guidance of an increase in sales of between 6 per cent and 8 per cent.

One suspects there won’t be many retailers that display similar levels of confidence about their outlook this reporting season, and few non-food retailers pursuing aggressive store opening strategies.