We are attracted to sectors which appear to be negatively impacted by bad headlines and the deteriorating conditions of areas they are exposed to. As such electronics retailers in Australia are an area we have kept an eye on for some opportunities, including JB Hi-Fi (ASX: JBH). Electronics retailers are not only exposed to deceleration in the economy but also other factors such as real-estate demand, the renovation cycle, and credit conditions, all of which are not currently in a favourable state for the sector.
Part and parcels with the current bad narrative for the industry is the expectation of Amazon entering the market in force and its impact on consumer behaviour, pricing, and margins.
The renovations cycle is, and will continue to, turn negative as the tightening credit conditions and falling house prices in Australia take a bite. UBS has recently noted an expectation that total dwellings activity will continue to decrease.
JB Hi-Fi has reported annual results which were all in all in line with expectations.
Gross sales has grown by 21.8% to $6.854B. This was composed by JBH Australia’s growth of 9.4% to $4.5B, JBH New Zealand’s -1.1% growth to $213.3m (AUD) and The Good Guys (JB Hi-Fi subsidiary) producing $2.101B.
JBH Australia’s same store sales growth was 6.2% and JBH New Zealand, despite the overall drop in revenue, grew same store sales by 2.4%. Backing out Backing out the 6.3% like for like growth for the third quarter would imply there was less than 4.9% growth last quarter. Taking into account that the FIFA world cup likely had an effect on TV sales in June, this would mean that April and May saw decreasing momentum aligned with the aforementioned slowdown in total dwellings activity. This is of note given those conditions will persist in the near-term.
The Good Guys reported negligible like for like sales growth of 0.9%. Their NPAT margin was a mere 3%, though slightly above guidance coming at $233.2m (guidance being $230m). The Good Guys EBIT came in at $61m, whereas JB Hi-Fi branded stores made up the bulk of the profit with EBIT of $292m.
This margin pressure may warrant some explanation. It is prudent for investors to look to trends in gross margins to build understanding of the competitive environment. Competition is felt in a retailers margins as a consequence of changing pricing. With increasing competitive retailers are forced to cut prices in order to defend their market share and stay competitive. Shareholders suffer the lower profit than may have been realised otherwise while consumers benefit.
JBH Australia’s Gross Margin was down 7 basis points to 21.7%. JBH New Zealand’s Gross Margin suffered more coming in 49 basis points lower than last year at 17.66%. The Good Guys saw the biggest Gross margin reduction of 99 basis points to 20.28%.
Lower margins with a relatively high inventory turnover rate seems to show that competition is intense.
JB Hi-Fi has offered a guidance of $7.1B in revenue for next year (an anticipated growth of 4.6%). Considering that JB Australia only expects five new stores this 4.6% doesn’t imply meaningful like for like sales growth.
Some have spoken of the guidelines being conservative and that management would be expecting to beat them. Given that these results have clear and good alignment with the deteriorating conditions JB Hi-Fi is exposed to, from a bad sector narrative with the fears of Amazon to the credit tightening and deteriorating residential real-estate activity, we are not so optimistic and will continue remaining observers.