JB Hi-Fi CEO explains gross profit pressure

Insight into company dynamics.

Since the JB Hi-Fi half-year announcement on Monday, analyst commentary has focused on the expectation that sales will exceed gross profit dollar growth in 2018.

In reporting these results, JB Hi-Fi CEO Richard Murray shared the following insights into the dynamics that have impacted the result:

“A key element of our customer promise is the biggest brands at the lowest prices in-store and online coupled with knowledgeable and passionate staff delivering great customer service.

“Online we strive to ensure our site simplifies the journey for customers whether they are researching or transacting.

“We work with our suppliers to build a relevant and agile promotional plan which coupled with JB’s ability to bring product to life in-store and online and that creates our unique customer proposition.

“It is this that enables us to maintain our price and market leadership.

“In Australia, gross profit grew 9.8 per cent to $545 million and gross margin was 22 per cent, a 20 basis point decrease on the prior corresponding period driven primarily by sales mix as we manage the growth of low margin categories and the decline in high margin software categories and price investment to reinforce our market leadership.

JB Hi-Fi group CEO, Richard Murray (Photo Credit: Sarah Matray)

“Our diversified product mix is critical to our model. Our ability to manage numerous categories through different stages of their life cycle is an important element in delivering sales and gross profit.

“As we have often discussed, we focus on growing gross profit dollars in absolute terms and ideally growing gross profit dollars within individual products categories faster than sales. Gross margin is relevant, but is an outcome of maximising the sales in each product category – sometimes this helps gross margin and sometimes it is ‘dilutionary’. As we look across our product portfolio, we are pleased with how we have maintained our price leadership and delivered great value to our customers.

“We consider our low cost of doing business a key enabler of our operating model. As we grow it is critical we don’t let complexity impact the culture of empowering team members to enable them to delight customers. The cost of doing business was 13.8 per cent, down 17 basis points on the prior corresponding period and in absolute terms grew 9.5 per cent.

“Total operating costs were in line with expectations and store wages remain well controlled as we continue to deliver the high standard of customer service that JB is known for.

“Our unrelenting focus on productivity and simplicity while maintaining our culture is a focus for all the organisation leaders from store managers to the executive team. JB in Australia has always operated on a low cost of doing business and in many ways, just maintaining it as a percentage of sales has been an achievement as we have had periods where we have had to balance low sales growth and investment in new stores or product categories online and digital as well as supply chain and solutions.

“That said it is pleasing with strong growth in sales of 10.8 per cent that an absolute cost of business has grown by 9.5 per cent. Coupled with our disciplined cap-ex program which saw depreciation only grow by 5.7 per cent, it was pleasing to see EBIT growth of 10.9 per cent to $183.7 million.”

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