Due to Amazon entry.

Citi analysts have downgraded long term earnings forecasts for JB H-Fi by more than 40% and Harvey Norman by more than 30%, following the expected launch of Amazon Prime in FY19. The analyst firm confirmed that these revisions are firmly based on the experience from global peers, including Dixons and Best Buy, when Amazon entered the US, UK and German markets.

“We downgrade JB Hi-Fi to sell and cut our target price by 35% to $18.50. We maintain our sell rating on Harvey Norman and cut our target price by 33% to $3.20,” a statement provided to Appliance Retailer read.

A Citi proprietary survey indicates Amazon is 15% cheaper than Australian retailers across three major categories – smartphones, headphones and 2-in-1 tablet devices.

“In our view, ASPs need to contract by ~10% to narrow this gap to ~5%. This will likely drive 7–11% declines in sales productivity and ~180bps–250bps declines in EBIT margins over three to four years. Gross margins are expected to be maintained near current levels as supplier funding, mix shift and efficiency gains offset initial gross margin pressure,” the statement said.

However, Citi believes retailers will see margins begin to recover five or more years after Amazon launches Prime.

“In the interim, we see upside risk to FY17 earnings and stand 2.4% and 3.5% ahead of consensus FY17 earnings forecasts for JB H-Fi and Harvey Norman respectively. We expect a further PER de-rating is likely on peak cycle earnings as the near term earnings outlook remains favourable.

“Amazon is poised to drive a material earnings decline and multiple derating for Australian electronics retailers. We have sell ratings on both Harvey Norman and JB Hi-Fi, with expected target returns of -15% and -18% respectively,” the statement said.

JB Hi-Fi and Harvey Norman were contacted for comment.