Electronics and appliance retailer JB Hi-Fi Limited (ASX: JBH) recorded significant pullbacks in its H1 FY 2024 results. Revenue dropped by 2.2% to $5.16bn and net profit suffered a 19.9% fall compared to H1 FY 2023. Investors expected worse results given the jump in the JB share price after results were released.
Source: JB Hi-Fi H1 FY 2024 Results Presentation
The JB segment across Australia and New Zealand posted revenue growth rates of 0.7% and 5% respectively with major sales across bigger ticket categories like mobiles, home appliances and whitegoods. However, The Good Guys segment performed poorly as revenue dropped 9.9% mainly due to softening demand for consumer electronics but its home appliance category remained resilient.
The substantial slip in net profit after tax was primarily due to a large jump in sales and marketing costs of $28.2m relative to H1 FY 2023 and pressure on gross margins. JB’s group gross margins descended from 22.8% to 22.2%. On a cash basis, JB still managed to produce similar levels of operating cash flow and capital expenditure. JB’s balance sheet remains sound with no debt and $488m of cash.
The trading update for last month doesn’t evoke excitement. Hence, it seems to me that the positive share price reaction may likely be a result of low market expectations beforehand. That said, I think investors are still underestimating JB, especially when viewed over the next decade.
Widening Gap
Whilst JB is dominant, I believe it will only widen the gap over the likes of Harvey Norman (ASX: HVN), Bing Lee and Kogan.com (ASX: KGN). Rather than follow the age-old retail model of big and fancy suburban stores, JB instead focusses on laying out stores in the most cost-effective manner to optimise foot traffic and sales. JB ensures stores are located in high foot traffic areas, close to big grocery chains or food courts. JB understand the importance of optimising sales per square metre. In comparison, I think Harvey Norman is preoccupied with growing its large format property portfolio, rather than configuring stores that help staff make sales.
Source: JB Hi-Fi Annual Reports
JB’s visual merchandising is also superior to that of its rivals. JB uses pop culture to not just reel in customers but also encourage impulse purchases. For example, the company recently jumped on the Taylor Swift bandwagon. Why not?
Surprisingly, JB’s online traffic has been the most resilient compared to even pure online players like Kogan.com and Appliances Online. It’s surprising given JB started out as a brick and mortar store in 2003. Perhaps humans crave familiarity after shopping at a physical store. Another possible reason why JB’s traffic is much higher than its rivals is the devotion to optimising its social media channels. Harvey Norman doesn’t even have a YouTube channel and the videos on Bing Lee just shares manufacturer videos. In contrast, JB is leveraging its existing sales staff to produce informative reviews of key products, helping break down any tech jargon.
As you can see, JB constantly strives to lift customer foot traffic whether that be stores or online. Comeptitors seem complacement and comfortable. This is the opportunity.
Customer traffic could look very different in a world where people are starting to embrace virtual reality. People are already playing with their Apple Vision Pro headsets whilst commuting, eating and walking. This could present a major headwind for brick and mortar retailers, especially if people can interact with large appliance products in virtual reality. Whilst not something to worry about in this instance, it’s worthwhile monitoring over the long term.
JB’s current market capitalisation is around $6.6bn and trading a forward price to earnings multiple of around 15.8x, which is slightly higher than the decade average of 13.6x. According to my discounted cash flow, investors are baking in the following assumptions at current share price levels.
In light of weaker competition along with the growing prominence of technology in everyday life, I think the above expectations are low for the next decade.
Disclosure: the author of this article does not own shares in JB Hi-Fi. The editor of this article does not own shares in JB Hi-Fi. This article is not intended to form the basis of an investment decision and is not an official recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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