By James Wells
SYDNEY: A major retail analyst has labeled JB Hi-Fi as a “high risk, high return investment proposition” based on a mix of declining music sales as well as strong earnings from aggressive store expansion.
Credit Suisse retail sector analyst, Andrew McLennan, said that despite retail music sales decreasing in the US market by 20 per cent, the Australian market should be more resilient for the Narta member.
“This accelerated decline in US music sales may be an indication of further shifts in the music distribution, but may also be a function of the deteriorating retail climate,” McLennan said.
“We have considered the implications of this accelerated downward trend taking hold in Australia (assuming it is structural) and the potential risk to JBH’s business model.
“We find that music sales would need to deteriorate to a level below -5 per cent for an extended period before the business model comes under pressure,” he said.
While second half 2006 data is unavailable for retail music sales in Australia, McLennan believes the market has been supported by strong local releases, thereby offsetting weakness in the category experienced over recent years.
“This is likely to have softened any impact for JB Hi-Fi over the period, but could prove to be only temporary. While offering a strong earnings growth profile from aggressive store expansion and plenty of operating and financial leverage, we continue to view JB Hi-Fi as a high risk high return investment proposition,” McLennan said.
JB Hi-Fi is expected to open six new stores in Australia during the second half of this current financial year, taking total stores to 78.