Company Overview - JB Hi-Fi Limited (JB Hi-Fi) is engaged in the retailing of home consumer products from stand alone destination sites, shopping centre locations and its online stores. The Company offers wide range of brands with particular focus on consumer electronics and software including music, games and movies. The Company operates in Australia and New Zealand. It offers the Hi-Fi, Speakers, Televisions, Digital Virtual Disk (DVD), Videocassette Recorder (VCR), Cameras, Car Sound, Home Theatre, Computers and Portable Audio and continues to stock a range of specialist Hi-Fi products. JB Hi-Fi also offers the range of video games, recorded music, DVD music and DVD movies.

Analysis - JB HI-FI (JBH), the in-store and online retailer, is in the limelight these days post declaring results’ updates at the recent annual general meeting. JBH’s total sales rose by 5.3% to $3.48b in FY14 as compared to FY13. Comparable sales were up by 2%. The Company witnessed a gross margin increase of 17 bps on the pcp. EBIT was up by 7.5% and EBIT margin rose by 11 bps. The Company’s NPAT increased by 10.3% and EPS was up by 9.1%.




Dividend payout ratio went up to 65% with total dividend up by 16.7% to 84.0 cps. Further, there was an on-market buy-back of 1.4 million shares. 



In Australia, the total sales went up by 4.8% with comparable sales up by 1.3%.  The converted HOME stores achieved comparable sales growth of 10.6%. Hardware sales were up by 8.6% with comparable sales up by 4.9%. Software sales were down 8.8% and comparable sales were down 11.7%.  Market-wide decline in tablet category affected the comparable sales in 2HY14.



Consolidated gross margin was 21.7%. The gross margin in Australia increased by 18 bps on the pcp.

In New Zealand, sales went up by 0.9% with comparable sales up 0.8%. Gross margin increased by 33 bps owing to better buying terms with enhanced market share.

The Company’s consolidated cost of doing business (CODB) was 15.2%, wherein the operating costs were as per JBH’s expectations. This entailed CODB increase by 10 bps to 15.2% in Australia and CODB of 15.4% in New Zealand. JBH aims to have NPAT and EPS growth closely associated with each other in view of nullifying the effect of shares issued under JBH’s employee share option plan through regular on-market buy-backs.

JBH’s term debt facility of $200.0 million expires in June 2016. At the end of the FY14, the total interest bearing liabilities were of the order of $180 million. Net debt increased from $56.96 million to $136.21 million, though in alignment with Company’s expectations.

JBH has been a discount retailer which operates on a low cost model while offering leading value home entertainment and consumer electrical product ranges. The Company has strength in bringing products and services both in store and out of store.

As at 30 June 2014, JBH’s sales channels constituted, JB Hi-Fi with 160 physical stores and an online store, JB Hi-Fi HOME with 22 physical stores and an online store, JB HI-FI NOW online digital content platform and JB Hi-Fi Commercial & Education segment (including JB Hi-Fi Education Solutions, formerly “Network Neighborhood”). The Company also acquired remaining 49% interest in the Network Neighborhood business during FY14, at a cost of $5.4 million. This is expected to contribute towards earnings growth in FY15.

A glance at the operational front reveals that FY14 brought a lot of movement with the opening of 8 new stores. Further, 13 JB HI-FI stores were converted to JB HI-FI Home. The final Clive Anthonys store and two JB HI-FI stores were closed.



The Company has seen a continuous growth in market share with its plus points relating to high level of customer service, passionate staff, sticky customer base, and price and deal leadership. JBH does not leave any stone unearthed with regards to its capability of showcasing innovative displays to attract customers.

For the JB HI-FI HOME segment, the Company highlighted immense opportunities with growth of share of the circa $4.6 billion home appliances market. Further, the Company believes that encouraging sales mix and medium term gross margins are expected to be above JBH’s average. This will facilitate the Company to expand its appliances’ division. The Company expects to convert 26 existing stores to HOME in FY15 and aims to have a potential for 75 HOME stores by end of FY16.



With regard to JBH’s online presence, sales rose by 13.9%. The unique visitations went up by 9.9% over the pcp to an average of 1.3 million per week. JBH also launched a new website on 01 July 2014 that offers an enhanced customer experience with better search functionality and enriched design.

The Digital segment (the NOW Platform) assists JBH to stay associated with its customers even after a physical purchase, as it provides customers access to digital content from any location and at any point in time. The Commercial segment allows JBH to have a strong growth while providing integrated offers to business and education clients. 



Further, the Company is developing an inexpensive, appropriate supply chain and logistics strategy to cater to its expansion into HOME, Commercial and large format TVs. In this direction, the Company has opened facilities in Melbourne, Sydney and Brisbane.

Inventory levels are also as per the expectations. The Company is able to manage its capital through buy-back options by virtue of frequent reviews of capital structure while maximizing returns to shareholders. In this regard, JBH recently announced for neutralizing impact of shares issued during August and September 2014, as mentioned earlier. The Company also believes that a dividend payout ratio of 65% balances the distribution of profit to shareholders and the reinvestment for future growth.

The Company confirmed that strong pipeline of new products will steer solid sales growth in FY15. Also, sales in FY15 are expected to be circa $3.6b steered by the JB HI-FI HOME roll-out, new stores, and expansion of JB HI-FI Commercial segment and the new website.



The Company expects to have a continued foot-traffic to its existing and new stores. It targets to have 214 stores across Australia and New Zealand. JBH further believes that easily accessible locations of its stores, growth in store and online segment, growth in Commercial segment, and engagement with customers through digital platforms, cumulatively aid in proffering long-drawn-out growth opportunities for the Company.

JBH also states that key factors which the Company is cautious about and is willing to be prepared to act timely in order to mitigate any risk, include highly competitive environment and specifically the online competition, international price changes, over-reliance on certain suppliers or products, increasing cost of doing business, price de?ation and location of new and existing stores to maintain profitability.


JB Hi-Fi Daily Chart (Source - Thomson Reuters)

We also note that the earlier effect of soft tablet sales is diminishing with expansion in new categories. The launch of new products around Christmas may also help improve technology whip. With the recent release of iPhone 6 and other such products appear to bring positive outcome for the electronics retailers including JBH. Further, market share may further better with products such as phablets. With regard to smart appliances category, JBH has developed a healthy relationship with Samsung which will help JBH to showcase the technologies through its HOME stores. Overall, JBH appears to be poised to witness improvement and better results with efforts in different directions.

Accordingly, we put a BUY recommendation for this stock at the current price of $15.29.

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