JB Hi-Fi’s Christmas trading period has helped the company to an impressive first half outcome considering the challenges. JBH noted strength throughout the half year period and has not seen much weakness in 2H22f so far.
JBH reported a 1H22 sales decline of just 1.6% across the group which was an excellent outcome considering the extent of lockdowns that blighted the period. The two-year compound annual comparable sales growth for both JB Hi-Fi Australia and The Good Guys was a healthy 9%.
Importantly, JBH’s EBIT margins have increased to 8.6% from 6.6% two years ago after peaking at 9.4% in 1H21. More specifically, EBIT margins at The Good Guys have lifted from 4.6% in 1H20 to an impressive 8.4% in 1H22. JBH has done a good job transforming this business since it was acquired in 2016 when EBIT margins were a skinny 3.5%. The majority of the gains came from higher gross profit margins which have increased approximately 20-40bp. The division is buying better, has a better sales mix of products and has reduced its discounting. The latter will normalise but it may take up to two years given current inventory shortages.
In the longer term, we think JBH can retain about half the recent EBIT margin gains made, with The Good Guys prominent within that feature.
Investment view
We do not see sales falling precipitously over the next two years as the switch in consumer demand away from retail will be gradual. Price inflation should also partially offset the expected drop in volume. JBH’s consumer electronics sales were actually below industry measures in 1H22 suggesting the company has ground to make up and the moderate sales outcome could have been better. Large screen TVs, headphones, gaming consoles, fridges, coffee machines and vacuum cleaners have been popular items as consumers stayed at home and spoiled themselves.
We expect JBH’s sales growth to remain almost flat over the next two years as conditions normalise. The average growth rate over the five years to 2024 is expected to be 5%. We note that the growth rate of consumer electronics over last 25 years has been 4.1% per annum.
A potential catalyst for the share price could be some form of capital management, perhaps a share buyback. We think JBH’s balance sheet could have over $200 million net cash as at 1H22 and the company is sitting on $470 million of franking credits. The conditions are ripe for such a measure and is a further reason we continue to rate the stock as a Buy.
