JB Hi-Fi punished as future margin pressure emerges

FY18 guidance below analyst expectations.

Despite delivering a record half year sales and earnings result, market analysts have punished JB Hi-Fi with fears of future gross margin pressure.

For the half year period, net profit was up by 37.4 per cent to $151.7 million and revenue was up 41 per cent to $3.7 billion, including The Good Guys. JB Hi-Fi Australian stores grew by 10.8 per cent to $2.48 billion, up by 7.8 per cent on a comparable basis.

“We are pleased to have delivered record sales and earnings in the first half. It was another strong result for the JB-Hi-Fi business in Australia, particularly through the important November and December periods. We are pleased with the progress we have made at The Good Guys and are confident about the future opportunities for the Group.”

Analysts were mixed in their interpretations of the result, noting that the drop in the share price following the announcement after a 16 per cent rise since Christmas and a 30 per cent increase in the two months to the end of January.

The main criticism revolved around the long term indication that annual profits are forecast to lag sales, and in doing so flagging tighter margins.

“We continue to be a sales led organisation with a focus on growing top line sales and gross profit dollars,” Murray said in his presentation.

But it was one of the last sentences in the group’s presentation regarding FY18 guidance for the first six months of the calendar year that has created the most attention. The guidance fell short of prior predictions of analysts while others have interpreted this as the emerging influence of Amazon.

“In the second half of FY18, we expect our focus on sales and market share, and continuing changes to sales mix, to result in sales growth exceeding gross profit dollar growth. As a result, in FY18, the company expects total group sales to be circa $6.85 billion (JB Hi-Fi $4.75 billion and The Good Guys $2.1 billion) and total group NPAT to be in the range of $235 million to $240 million an increase of 13.1 per cent to 15.5 per cent on underlying NPAT in the prior corresponding period.”

Summary

JB Hi-Australia:

– sales grew by 10.8 per cent to $2.48 billion

– comparable sales for the period were up 7.8 per cent

– hardware and services (sales excluding music, movies and games software) were up 13.5% with communications, computers, audio, drones and games consoles as key categories

– standout products were Google Home and Nintendo Switch

– software sales were down by 6.5 per cent as a result of acceleration in decline in the Movies category but partially offset by growth in the Games Software category

– online sales grew 40.6 per cent to $119.3 million or 4.8 per cent of sales

– gross profit increased by 9.8 pr cent to $545.3 million

– gross margin was 22 per cent

– cost of doing business was 13.8 per cent

 

JB Hi-Fi New Zealand:

– total sales were down 0.4 per cent to NZ124.6 million

– comparable sales were up 2.4 per cent

– second quarter comparable sales were up 8.7 per cent

– online sales grew 89.8 per cent to $NZ4.8 million or 3.8 per cent of total sales

– gross margin was down to 17.5 per cent

– one store was closed during the period

– whitegoods exited with all four JB Hi-Fi Home stores rerecorded to JB Hi-Fi

– a continuing reposition of the New Zealand business as part of a strategy to improve performance

 

The Good Guys:

– total sales were $1.1 billion, up 2.4 per cent

– comparable sales were up 1.8 per cent

– key growth categories were seasonal products, cooking, communications, visual and dishwashers

– online sales were down 1.7 per cent to $72.7 million or 6.6 per cent of total sales

– two new The Good Guys stores were opened at Robina and Tingalpa

 

January Outlook:

– total sales growth for JB Hi-Fi was 6.9 per cent compared with 9.8 per cent a year earlier with comparable sales growth of 4.5 per cent compared with 7.2 per cent in January 2017.

– total sales growth for The Good Guys was down 3.5 per cent compared with 5 per cent growth a year earlier with comparable sales growth of -4.7 per cent compared with growth of 3.5 per cent in January 2017. The change in performance was impacted by strong sales of seasonal products in the prior corresponding period.

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