By James Wells

JB Hi-Fi has sent shockwaves through the retail sector after issuing a profit downgrade after the close of trade yesterday afternoon, blaming the discounting of other retailers and price deflation in the AV sector.

Shares fell by almost 15 per cent by lunchtime today with Myer and David Jones also losing around 4 to 5 per cent of their value. Harvey Norman again fell below the psychological $2.00 share price with a 7 per cent drop to $1.96 at 2.00pm this afternoon.

In the trading update issued yesterday, JB Hi-Fi CEO Terry Smart said: “Sales in the second quarter have improved but unfortunately not enough to counter the impact of the first quarter decline in sales and margin driven in large measure by a high level of discounting in the market, with some retailers pricing inventory below cost to drive foot traffic and/or clear inventory,” he said.

“Throughout this period we have maintained our low price promise to customers, and as a result, our gross margin has been impacted,” Smart said.
According to a report issued by Citigroup yesterday evening, “JB Hi-Fi is set for a bumpy ride in 2012”.

“The group is looking to hold market share but we see this coming at the expense of profit margins.

“The impact has been negative for margins… and we expect this dynamic to persist in the second half of the year given the competitive industry landscape.

“While like for like sales are negative, they are above the broader electronics industry.”

Industry sales have declined 4.6 per cent in the four months from July to October 2011, according to data from the Australian Bureau of Statistics, but other leading industry sources have claimed confidentially that they have seen more recent data that suggests it could be as high as 5.9 or 6.8 per cent for the first six months of 2011.

There was some good news embedded within Smart’s 12-paragraph trading update however with strong growth reported in computers, IT and accessories. Telco has started to contribute some good growth he said following the introduction of the iPhone 4S in early October.

Smart also said online sales are up 80 per cent on the prior period following the introduction of new components to the service offer including pick-up in store, factory scoop and direct imports with an average of 934,000 average unique visitors per week.

Smart said the target of 214 JB Hi-Fi branded stores provides a platform for solid growth over the next five years. Since July, 10 stores have opened, with a further six expected in the first half of next year.

“The market remains challenging but we continue to gain market share, leveraging our highly productive stores and a low cost structure,” Smart said.

“Our unique brand proposition provides consumers with not only low prices but also an entertaining and engaging shopping experience. Consolidation in the consumer electronics and home entertainment sector is inevitable and is likely to accelerate over the short term with JB Hi-Fi a likely primary beneficiary of this trend. Combined with our new store roll out program, we should continue to enjoy total company sales growth and entrench our position as the leading retailer in this sector,” he said.