Image source: Song_about_summer, Shutterstock

JBH Details
Witnessing modest sales performance due to increasing competition:During Q3FY17, JB Hi-Fi Limited (ASX: JBH) reported a sales growth of 8.2% year on year (yoy) while posting total sales growth of 10.8% yoy. The acquired Good Guys business reported a subdued comparable and total sales growth of 1.2% yoy and 2.6%, respectively. Although the sales from the acquired business was not impressive, it is expected to significantly expand JB Hi-Fi’s capability in the attractive home appliances market through store roll-out and continued market share gains. The company reaffirmed its FY17 guidance, with total sales ~$5.58 billion (JB Hi-Fi sales of $4.33 billion and The Good Guys’ sales of $1.25 billion), while the group’s underlying profit after tax is expected to grow by 31.4% - 35.4% to $200 - $206 million. It has remained confident of achieving synergies of $15-$20 million per year after a three-year integration period, by leveraging on its discount retail proposition across a wide range of products from entry level to premium, brand position, merchandising and promotional activity. Importantly, JB Hi-Fi’s lowest cost of doing business (~15.2%) among major Australian listed and international consumer electronics retailers enables it to maintain low prices (gross margins of ~22%) and compete effectively in the market. Further, most of its shopping centers are located at high foot traffic and easily accessible areas, which enhances strong partnerships with all major suppliers as they provide suppliers the ability to showcase their product. 

Sales and NPAT Momentum (Source: Company Reports)
 
Strong H1FY17 performance:JB Hi-Fi reported 23.6% yoy sales growth and 31.7% yoy growth in profit after tax to $2.6 billion, $125.4 million respectively, led by strong sales from Communications, Audio, Cameras, Accessories, Computers and Home Appliance categories. while statutory net profit after tax stood at $110.4 million. Further, the company has successfully completed the $870 million acquisition of Good Guys during the same period. Moreover, online sales grew by 40.4% yoy to $84.8 million and contributed to 3.8% of total sales, driven by continuous improvement across the company’s digital assets. JB Hi-Fi solutions’ division remains on track to achieve sales of ~$500m per annum, through both organic growth and strategic acquisitions. The company’s low CODB (cost of doing business) remained a competitive advantage while minimizing indirect expenditure.
Amazon’s entry to impact the local retailers: The recent announcement of Amazon’s entry into Australia’s retail services sector has already started impacting local retailers with top line and some portion of earnings forecasted to fall over the next few years. Importantly, Amazon’s scale and technology/software play an increasingly key role in broad swaths of business and shaping the marketplace.
 
Recommendation:Though stock performance is flat over last twelve months, it has declined by 18.2% over the past three months after a strong surge in January and February 2017 at the back H1FY17 results. However, despite the management optimistic outlook, given the increasing competition and challenging environment for local retailers, we believe as it is going to be a tough scenario and will impact company’s operating margins and bottom line. Notably, entry of large e-commerce player is expected to play on the economies of scale. We give a “Sell” recommendation on the stock at the current market price of $ 23.86


JBH Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.