JB Hi-Fi Facing Heightened Uncertainty

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Household goods and electronics retailer JB Hi-Fi posted strong sales in the September quarter but the company has chosen not to upgrade its full year guidance.

-Significant product releases pre Christmas suggest sales guidance may be conservative
-More rational market now providing scope for scale and margin gains
-Increased uncertainty created by the need to incorporate The Good Guys
 

By Eva Brocklehurst

While household goods retailer JB Hi-Fi ((JBH)) posted strong sales in the first quarter of FY17, brokers suspect the exit of the Dick Smith chain had a significant impact on this result. This effect is likely to be lapped in coming months, suggesting the sales growth rate will slow.

September quarter sales grew 12.4% at the headline level and 8.3% on a like-for-like basis. Full year sales guidance of $4.25bn, excluding The Good Guys, was reaffirmed by the company, which implies 7.5% sales growth year on year or around 4.5% on a like-for-like basis.

Implicit in guidance, brokers suggest, is a view that the supportive tailwind from Dick Smith will ease after the first half. Yet recent industry feedback flags strong product releases are in the wings pre-Christmas, including a new iPhone, new gaming consoles, virtual reality devices, and the Google phone, and this signals guidance may be conservative.

Despite the cycling of the Dick Smith impact, Bell Potter expects sales trends will remain favourable given the strong housing market and the conducive consumer spending environment. Yet from a risk perspective, the broker is cautious on two key fronts: firstly, because of the execution risk tied to The Good Guys acquisition; and secondly, because of JB Hi-Fi's increased leverage to the housing turnover cycle, which the broker suspects has peaked.

The Good Guys is in transition from its former partnership structure, which implies operational risks. Bell Potter believes the risk of staff instability also extends to senior management, where conflicts may arise refgarding the strategic direction of the group. The broker, not one of the eight monitored daily on the FNArena database, retains a Hold rating and $29.45 target.

UBS believes there is upside risk to its estimates, should the run-rate exhibited in the first quarter continue. The broker estimates that every 100 basis points increase in like-for-like sales at JB Hi-Fi provides a 1% lift to growth in earnings per share, all else being equal and assuming no lift in margins. UBS retains a Buy rating.

The update also underscores the broker's view that the macro backdrop is robust, with a more rational market now the top four players have consolidated into two – JB Hi-Fi and Harvey Norman ((HVN)). This eases competition pressures and provides scope for scale and margin gains. Moreover, the continued strength of Australian housing is expected to support household goods retailers until around 2018.

Credit Suisse is not so confident and anticipates a slowing in the housing sector in 2017. Moreover, with the ownership changes there is more than the usual uncertainty about the current level of sustainable earnings from The Good Guys. Therefore the company's guidance for FY17 earnings to be in line with FY16 is considered realistic under the circumstances.

Expansion of The Good Guys store base necessitates taking share in a crowded appliance market, Credit Suisse asserts. The broker retains an Underperform rating. Acquisition of The Good Guys is expected to be completed on November 27 but if conditions are not met it will take place in early 2017.

From industry feedback, Deutsche Bank infers that the appliance category has slowed and the impending change in structure at The Good Guys has caused market share losses. The broker believes this a key risk for JB Hi-Fi and prefers exposure to Harvey Norman.

Morgans anticipates guidance will be updated post completion of The Good Guys acquisition. Additionally, if the acquisition is successfully completed by late November, this would provide around 4% upside to earnings per share on FY17 forecasts stemming from the inclusion of December trading, which the broker estimates is around 15% of The Good Guys' full year sales.

There is also upside risk to FY17 sales targets based on Australian Bureau of Statistics retail sales data, in Ord Minnett's view. The risk to the broker's own sales estimates, which assume 8.3%, not the 7.5% in the guidance, is envisaged skewed to the upside as total sales growth needs only be 7.3% for the remainder of FY17 to meet these estimates.

The broker considers the management changes being implemented as The Good Guys is merged into the JB Hi-Fi corporate structure are sensible as JB Hi-Fi must work through a significant execution project. The company has maintained its long-term target of 214 JB Hi-Fi stores across Australasia and expects to open seven new stores in FY17.

FNArena's database shows three Buy, two Hold and two Sell ratings for JB Hi-Fi. The consensus target is $29.67, suggesting 5.0% upside to the last share price. Targets range from $27.20 (Citi) to $32.75 (Morgans).
 

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