JB Hi-Fi: Interim result 2013

JB Hi-Fi’s share priced has soared over 15% since it announced a 3.1% rise in sales to $1.8bn for the half-year ended 31 December. Net profit also rose 3.0% to $82.1m. This is at a time when, according to the Australian Bureau of Statistics, electronic retail sales have declined; JB Hi-Fi is the clearly winning market share.

Chief executive Terry Smart also flagged a return to a more rational pricing environment – which bodes well for the rest of the year. The board declared an interim dividend of 50 cents per share (fully franked, ex date 15 February).

The headline growth was led by opening new stores. Like for like sales fell 3.5% due to continued price deflation across most product categories. Sales of software (DVDs, CDs, computer games), which still make up 24% of JB Hi-Fi’s total sales, fell 10.9% on a like for like basis over the half. These sales will continue to decline as more consumers download or stream their favourite TV shows, music and computer games. Sales of hardware (TVs, computers, audio systems, tablets) fell 0.8% on a like for like basis but, if you strip out TV sales, which declined a massive 17.9%, hardware sales actually rose 4.0%. This reaffirms that JB Hi-Fi remains the ‘go to’ destination for electronic goods.

The company's online store grew sales 40.3%, but still only accounts for a tiny 2% of overall sales. Other profit metrics also impressed, with gross margins and cost of doing business basically flat. JB Hi-Fi remains the best retailer in the segment.

Still, as we outlined in Which retailers will survive? Part I, the retail industry is changing. While the latest result means some of the short-term fears have receeded, longer-term ones remain. It doesn’t matter how efficient JB Hi-Fi is at traditional retailing if the game has moved online, where costs are structurally lower.

And we’re not convinced by JB Hi-Fi’s response so far. Selling lower margin, bulky white goods isn’t a smart move, nor is opening new physical stores in a shrinking market. This is not to say JB Hi-Fi can’t adapt. But with a very uncertain future, the general fragility of earnings in the retail business, and with the share price up 17% since Which retailers will survive? Pt 2 from 15 Jan 13 (Avoid – $10.83) we suggest you continue to AVOID the stock.

Harvey Norman’s share price rose with JB Hi-Fi’s results as investors priced in a more rational pricing environment. We’re more circumspect. If JB Hi-Fi is winning market share, it's most likely at the expense of Harvey Norman. We have low expectations for Harvey Norman and, with the stock price up 26% since 15 Jan 13 (Hold – $1.89), it remains a HOLD – although an exit beckons.