JB Hi-Fi’s remarkable sales trend pushed on through February and March, even against the high sales hurdle from last year. There is every chance this could persist for most of 2022.
The trading update for the period 1 January to 23 March showed JB Hi-Fi Australia comparable sales growth of 10.5%. As January was up 3.6%, this implies growth over February and March was 14.7%.
At The Good Guys, growth in February and March was up 7%.
For further context, this places the two-year combined comparable sales growth to March 2022 for JB Hi-Fi Australia at 23.2% and for The Good Guys at 11.2%.
These levels are unlikely to be sustained in the medium term, but we also do not think that sales will fall suddenly, but rather sales will fade. In that sense, we expect both JB Hi-Fi Australia and The Good Guys comparable sales to slip into negative territory for most of FY23f.
A combination of faster than expected sales and higher gross margins has lifted EBIT margins for JBH. We think this justifies a higher assumed EBIT margin for FY22f but for it to subside to 11-14% in FY23f and FY24f given that wage costs should be higher.
It seems clear that gross margins will remain above historical levels in The Good Guys which we see as a function of lean inventory across the industry.
Investment view
The heady sales trend should support the share price over the next six months. Gravity will eventually catch up, but we think the inevitable sales slow down will be further away and milder than anticipated.
Even so, JBH has still not provided guidance for FY22f after yet another positive trading update. The company’s confidence was also demonstrated at the recent 1H22 result with the $250 million offmarket buyback and increased interim dividend. Even after the buyback, JBH will be in a net cash position which could allow the company to lift its dividend payout ratio.
A high savings rate and good income growth together with some retail price inflation supports a healthy earnings environment for JBH and the industry. We do not think the company is taking market share, rather it is category strength that is driving sales.
Risks to investment view
Earnings may be at risk if the economy affects consumer spending to a significant degree. Changes in incomes and savings levels may result in changes to sales. Competition is always a key earnings factor as JBH’s products are branded goods with intense price competition.
Recommendation
We have retained our Buy recommendation.
