JB Hi-Fi (JBH) is a chain of electrical stores, selling leading brands of hi-fi, speakers, televisions, DVDs, cameras, car sound, home theatre, computers, white goods, portable audio and a variety of music, games and movies.
The company has been able to grow its sales over the last 5 years in what can only be described as the most difficult trading conditions for retailers in 20+ years.
JBH’s strategies for growth are simple; increase the number of stores, increase sales, and through that, increase profit. JBH’s expansion is not only in the Australian market, but also in New Zealand. Since entering the New Zealand market in early 2007 it has opened 13 stores.
JBH’s FY12 results were ok without being great, but in context of the consumer environment over the twelve months, the results was great in our view.
Sales for the twelve months to June 30 were $3.13 billion, up 5.7% on the prior year. This was a solid result given that major retailers including Myer, David Jones and Harvey Norman all recorded negative growth.
Net profit was $104.6 million, down 4.6% on the FY11 result. The company blamed heavy price-cutting by rivals which saw its EBIT margin decrease by 33 basis points to 5.2%.
What is one of JBH’s major strengths is its cost of doing its business (CODB). Its COBD fell 70 basis points to 14.9%, which is much lower than competitors Dick Smith, David Jones and Myer, which were at 23.5%, 29.0%, and 32.1% respectively.
As mentioned JBH has been operating in a weak consumer environment, however it could be on the verge of a turnaround. The consumer sentiment index rose 1.0% to 99.2 in October.
A reading below 100 indicates that more consumers are pessimistic about the economy than optimistic. Despite more pessimist than optimists the index is at its highest point since February 2012.
Helping sentiment was the RBA earlier this month cutting the official cash rate by 25 basis points and hinting it was moving towards a more easing bias. We believe this move will help grow consumer confidence which in turn should help grow retail sales.
The turnaround in consumer sentiment may be closer than many think with Woolworths CEO Grant O’Brien saying yesterday “I think there’s a little bit of light at the end of the tunnel in terms of the customer feeling better.”
JBH’s full year results showed sales growth, which in an environment where other retails are contracting, is a positive.
The company’s low CODB when compared with its competitors also allows it to continue its aggressive pricing strategy; this ensures it does not lose its current market share and helps it actually gain market share.
As for the consumer environment we are finally seeing signs of a turnaround and we would not be surprised if the next consumer confidence reading indicates more optimists than pessimist.
We have been hesitant to recommend longs on any retailers as of late given the tough environment, but if there is a turnaround in this area we believe JBH will be one the first to benefit.
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