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Headwinds Loom For JB Hi-Fi

Australia | May 07 2020

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

JB Hi-Fi has had a stellar couple of months as consumers stock up on goods related to the home but this is likely to fade as the realities of higher unemployment and a softening housing market emerge.

-June trading to be of heightened interest as tax year ends
-Caveat to a better outlook is the prospect of additional bouts of infection
-Online sales growth likely to accelerate regardless


By Eva Brocklehurst

JB Hi-Fi ((JBH)) is in a purple patch as the pandemic lockdowns send consumers scurrying to snap up computers, TVs and breadmakers, but will it last? Citi points out both JB Hi-Fi and The Good Guys gained market share in the March quarter as their growth rates were twice the rate of industry growth.

Like-for-like sales growth in the March quarter was 11.3% at JB Hi-Fi and 13.9% at The Good Guys and the company has flagged strong sales continued in April and early May. Still, several brokers expect this will slow down materially over the next few quarters as at-home consumption fades and the realities of higher unemployment and a softening housing market emerge.

Continued strength in April and early May suggests the uplift associated from entertaining, learning and working from home was more substantial than Morgan Stanley had anticipated previously and this is also a positive read for Harvey Norman ((HVN)), with both stocks expected to trade strongly on the back of JB Hi-Fi's update.

However, Macquarie assesses the demand which is currently driving sales will moderate as the economy softens. Consumer categories that benefited during the lockdown are likely to give way to others as the population moves around more freely. In that way, the broker prefers Harvey Norman because of its property portfolio.

To further strengthen liquidity, JB Hi-Fi has added a $260m short-term debt facility, which is not likely to be drawn on at the present time. The company has closed three airport stores and seven CBD stores, redeploying its staff across the network. All The Good Guys stores remain open. NZ stores have been closed since March 26 while online and commercial business has resumed since the restrictions were relaxed.

Morgans assesses June is a key trading month and will be of heightened interest this year as it has been difficult to determine just how much demand is yet to be met. Credit Suisse is also interested in how business expenditure will evolve over May and June, given it is the end of the tax year. The broker maintains forecasts for like-for-like sales growth at JB Hi-Fi and The Good Guys of 10% and 5%, respectively, in the fourth quarter and flat gross margins in the second half.

Citi expects fourth quarter sales growth of 5.8% and 4.0% respectively for the two brands. While this is a marked slowdown from the March quarter it still is above the normalised levels of 2-3% which the broker expects over the longer term.

Beyond 2020

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has revised expectations up significantly for FY21 and FY22, as the trend in fourth quarter sales appears well above that which would be expected at the start of a severe cyclical downturn. Earnings revisions are driven by this outlook plus the better than expected situation in terms of the pandemic.

The governments of both Australia and New Zealand are now talking about relaxing restrictions. The broker retains a Neutral rating with a $35.50 target and asserts one caveat to estimates: the depth and duration of the coronavirus impact, should additional bouts of infection require a return to elevated containment measures.

Citi expects Australia's economy will experience at least 12 months of income decline and retailers will suffer a similar fate. Still, more than half of retailers are expected to trade solidly and there could be continued sales growth for home-based entertainment and DIY, as areas such as travel and mass entertainment remain restricted for longer.

Citi ascertains higher operating costs will reduce operating leverage for JB Hi-Fi. Incremental margins on better sales are expected to slow to around 9% for both brands, below what is considered normal levels. The broker remains reluctant to extrapolate the current rate of growth, given this was boosted by the setting up of working and learning from home.

Bell Potter also envisages headwinds emerging in FY21 from the weak macro environment and the risks to the housing cycle, as well as the need to cycle tough comparables. Accordingly the broker, not one of the seven, retains a Hold rating and $34 target.


There is enough support for the stock on the basis the market is still to fully reflect March quarter trading in its FY20 estimates and the fact technology has become the "new essential", but Credit Suisse is lukewarm about discretionary retail exposures in the early stages of a recession. That said, the business could, relatively, outperform and a dividend is also more likely.

Valuation support has ebbed, in Ord Minnett's view, and further upside would require more confidence in the external environment, and this is considered difficult given rising unemployment. Hence, the broker downgrades to Hold from Accumulate.

Morgans also downgrades, to Hold from Add, given the strong run up in the share price but finds little to fault with the retailer, noting it is one of the few that may actually pay a dividend over the next couple of half-years. The broker also points out the innovation outlook in the electronics category remains favourable.

With around 90% of valuation attributed to cash flow beyond FY21, UBS believes the risks are more than priced in. A benefit post the pandemic from market consolidation is possible, and then there is the acceleration of purchasing online. On that subject, Credit Suisse incorporates additional costs associated with a significant acceleration of online sales and believes a large proportion of the online sales growth will be sticky.

FNArena's database has six Hold ratings and one Buy (UBS), with a consensus target of $35.99 that suggests 3.6% upside to the last share price. Targets range from $32.87 (Credit Suisse) to $40.00 (UBS).

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