By Claire Reilly
Despite issuing a profit downgrade in the closing weeks of 2011, industry analysts have suggested that “the market is unfairly valuing” JB Hi-Fi, and that it is not the basket case that many presume it to be.
RBS issued a report on the retail industry this week, offering insights into the performance of all the big chains, including JB, Harvey Norman, Myer and David Jones.
In the report, RBS noted that JB was particularly exposed to the price deflation in electrical products (unlike the other retailers, which operate in a broader range of categories), but that the worst of this deflation had already taken place.
“JB Hi-Fi remains exposed to the most challenged categories within the electrical segment. Nonetheless, price deflation is an issue that most retailers will have to contend with in coming years as Australian price points normalise to global levels.
“In the case of electrical products, this process is in an advanced stage. While there is certainly further deflation ahead in major categories, electronics products are much closer to global price points than other product categories.
“JB Hi-Fi’s December downgrade came months after other retailers had already downgraded their FY12 guidance. In our view, the market is unfairly valuing the balance of risks for this business.
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RBS also reviewed the performance of electrical products in Myer, noting that “while the electrical category has been challenging, this category has been progressively de-emphasised [at Myer], and should not have a material impact on group turnover”.
David Jones, on the other hand, has entered the New Year “from a disadvantaged inventory position” according to the report. “We understand clearance discounting has been deeper than the prior corresponding period and as a result we anticipate GP [gross profit] margin contraction,” it said.
Finally, commenting on Harvey Norman, RBS said the company “has undertaken some creative and aggressive promotional programs over the quarter which are likely to have seen it take share in numerous categories”
“Also, its exposure to furniture and bedding will likely support better underling growth relative to its peers. While our survey suggests the GP margin outcome for the electrical category appears to be reasonably stable, higher operating costs will result in EBIT [earnings before interest and tax] margin contraction.
Harveys “took some closure costs in 1Q12 (which contributed to its 19.3% contraction in 1Q12)… however it will take further costs in 2Q12.”