JB Hi-Fi
Recommendation
All sorts of things start going wrong when a retailer’s sales stop growing. For JB Hi-Fi, same-store sales for the Australian JB Hi-Fi branded stores went backwards by 3.1% in the first half of 2012 as price deflation and aggressive discounting intensified. As a result, gross margins, earnings before interest and tax (EBIT) margins and the cost of doing business all deteriorated.
Don’t be fooled by the innocuous headline numbers. Sales rose 5% to $1.77bn, while net profit fell a comparatively restrained 9% to $80m. Earnings per share was flat at 80.7 cents, reflecting the benefit of the share buyback in May 2011. The interim dividend was lifted by one cent to 49 cents, fully franked (ex date 17 Feb).
Half ending 31 December | 2012 | 2011 | Change (%) |
---|---|---|---|
Revenues ($m) | 1,775 | 1,683 | 5 |
Net profit ($m) | 80 | 88 | -9 |
Cost of doing business (%) | 14.4 | 14.0 | 3 |
Same-store sales (%) (JB Hi-Fi Aust. only) | -3.1 | -0.9 | n/a |
EPS (c) | 80.7 | 80.6 | n/a |
DPS (c) | 49.0 | 48.0 | 2 |
Franking (%) | 100 | 100 |
But these numbers don’t tell the story of how bad it could get (for that, see JB Hi-Fi: Steep descent ahead from 17 Jan 12 (Sell – $11.75)). On that front, there’s not much good news. Same-store sales in the first six weeks of the second half have fallen 3.9%. Deflation, discounting and consumer caution are not abating.
Perhaps the main note of optimism on the conference call was that management expects all suppliers to share the pain. The company has been ‘parallel importing’ some merchandise to successfully pressure suppliers into lowering their wholesale prices. Management also explained that landlords should not expect significant rental increases as leases come up for renewal.
While retailers such as JB Hi-Fi do have the capacity to reinvent themselves, there’s no reason to change our view from 17 Jan 12 (Sell – $11.75). The stock is up 2% and the risks of further margin compression are significant. SELL.