This consumer discretionary business behaves more like a staple in many respects. In the midst of a COVID case spike and difficult supply chain issue, JB Hi-Fi’s mojo hardly missed a beat.
JBH’s 1H22 result was pre-announced back in January, but the details show gross margins were very strong in The Good Guys and January sales trends have been encouraging despite the scourge of further COVID disruption.
Online sales zoomed to $1.1 billion in the half year, boosted by the temporary closure of some stores. JBH is renowned for its in-store customer service, but the company has translated this to its online category with an efficient fulfilment model ensuring on-time deliveries.
We identify inventory levels as a possible area for concern. Inventory is down 6% on last year and a similar decline compared to two years ago. Lean inventory may lead to some missed sales opportunities, but it should support gross profit margins. The inventory decline is not acute but requires a close watch.
Gross margins during the period for JBH Australia were down 21bp, but free delivery during lockdowns was a 25bp drag implying that underlying margins may have in fact risen.
The Good Guys has also improved its gross margins through better buying, a mix shift towards cookware and small appliances and reduced discounting.
Investment view
JBH has shown that sales trends remain resilient despite the on-going uncertainty caused by COVID. That uncertainty is enough for JBH to not issue sales and earnings guidance for the full year although the January trading update left the company pleased with its start to the second half.
Also belying the company’s caution was the off-market buyback announcement. This will add 3-4% to consensus earnings forecasts for FY23f as it seeks to optimise the company’s capital position and utilise some ($99 million) of the franking credits piling up. Including the dividend, JBH will be returning up to $437 million to shareholders.
Even after the buyback, JBH should be in a net cash position. This may allow the company to lift its dividend payout.
We expect stable sales and continuing healthy gross margins to result in a fade in earnings rather than a precipitous fall over the next two years. A high savings rate and good income growth together with higher retail price inflation augurs well for Australian retail sales in 2022.
