Our thesis that JB Hi-Fi’s sales will fade slower than the market thinks is holding true. Even with a pre-released result, the market has fretted over rising inventory and falling consumer confidence and yet customers are still queuing up for the yellow and black bags.
Rising inventory levels appear to have induced some market concern, but at 53 days of sales, this amount is merely a normalisation for JBH. Inventory increased 21% on last year but net working capital is still below FY19 levels. We think a decent portion of the lift in inventory is investment buying ahead of price rises. This aspect was evident in the 2H22 period shown by gross margin increasing 81bp.
The Board declared a fully franked final dividend of 153cps bringing the full year total to 316cps. JBH had already increased its interim dividend and executed a $250 million off-market buyback. Shareholders have seen a good return on equity once again at 42.6% and there are $451 million of franking credits available. JBH’s balance sheet is super conservative with leverage (net debt to EBITDA) of just 0.47x against its limit of 3.5x. Interest cover is a head-spinning 602.1x.
July sales have continued briskly with like-for-like store growth up 9.2% at JBH Australia and 7.8% at The Good Guys. Although JBH said it is pleased with the start to FY23f, the company has again decided not to provide a sales target for the year. This is opening the market to speculate on how quickly sales will fade. CEO Terry Smart said: “As we enter an increasingly uncertain retail environment and household budgets come under further pressure, customers will gravitate to trusted value-driven retailers.” On the one hand, he is pointing to things getting tough but then subtly suggests that JBH will be fine, regardless.
With a sales decline expected for FY23f, consensus forecasts for the year are pointing towards a smaller net profit. The FY23f dividend will therefore be approximately 240cps based on a payout ratio of 60% of earnings. This puts JBH on a net dividend yield of 5.3% and a PE ratio of 12.3x FY23f eps which is not demanding, in our view.
Investment view
Gross margins will continue to benefit from the normalising inventory levels, particularly at The Good Guys, but are being hotly pursued by the rising cost of doing business.
JBH’s FY22 result was typically gritty with its legendary financial discipline quite evident and its operating leverage to good sales growth again on display.
We think current good sales trends can continue to November, ensuring a good 1H23f result. But we anticipate that sales trends will slow meaningfully in calendar 2023 and margins will fall.
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 reduced our recommendation to Hold from Buy.
Figure 1: JBH FY22 result
Figure 2: working capital to sales
Figure 3: Gross margin
