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Morningstar | JBH Updated Forecasts and Estimates from 09 Oct 2018

We have increased our fair value estimate for no-moat-rated JB Hi-Fi by 7% to AUD 24.50 from AUD 23.00, mainly due to the time value of money. We expect JB Hi-Fi to continue consolidating the fragmented Australian consumer electronics market, taking share from smaller brick-and-mortar retailers, and our revenue and EBIT margin estimates arelargely unchanged over our 10-year forecast period. In Australia, total sales for JB Hi-Fi and The Good Guys grew by 6.8% in fiscal 2018, well ahead of the Australian consumer electronics and home appliances market at 2.6%.

The Good Guys business, which JB Hi-Fi acquired in 2016, and the software category within JB Hi-Fi Australia were a drag on group sales. On a comparable 12-month basis, total sales at The Good Guys were up by 1.5% with like-for-like sales growth of only 0.9%. Fiscal 2018 was a year of transition for the home appliances specialist. We expect a stronger fiscal 2019 for The Good Guys, with much of the disruption associated with the new ownership behind it, and the introduction of a new incentive scheme for its sales staff to accelerate sales growth. Despite fierce price competition among home appliance retailers, The Good Guys posted positive comparable sales growth of 1.4% in July 2018, a noticeable improvement from the virtually flat like-for-like sales in the second half of fiscal 2018.

The Australian JB Hi-Fi segment increased total sales by 9.4% and like-for-like sales by 6.2%. Excluding the struggling software category and weak DVD sales, JB Hi-Fi Australia increased total sales by a whopping 11.9% and like-for-like at 8.6%.

We expect the software category to continue losing share of JB Hi-Fi’s Australian sales. It contributed just 10% to sales in fiscal 2018, down 200 basis points on fiscal 2017. Hence, we expect its negative impact on sales growth for the Australian business to peter out in the medium term. The category shift to the relatively lower-margin hardware and services categories is a slight negative for gross margins, but we anticipate greater scale benefits in these growing categories to largely offset the impact.

The JB Hi-Fi business in New Zealand posted another disappointing result, but its contribution to the group is immaterial. Even achieving break-even in fiscal 2019, up from an operating loss of NZD 3 million, has little impact on group EBIT. In New Zealand, JB Hi-Fi is smaller than key competitors Harvey Norman and Noel Leeming, and competition is fierce. Management is repositioning the business and has exited the white goods category, rebranding all four domestic JB Hi-Fi Home stores to JB Hi-Fi. A loss-making store was closed in fiscal 2018, and another struggling location shut in July 2018, bringing the total number of stores in New Zealand down to 14.

Online sales are rapidly growing and outperforming in-store sales growth across all three segments, increasing by 32% at JB Hi-Fi Australia, by a relatively muted 7% at The Good Guys, and almost doubling in New Zealand in fiscal 2018. We estimate that e-commerce drove about 20% of like-for-like sales growth at JB Hi-Fi in Australia, with in-store like-for-like sales growth in the physical store network growing by just under 5%. In Australia, the group’s online penetration increased to 5.1% of total sales, up from 4.5% in fiscal 2017.
Management provided sales guidance of AUD 7.1 billion for fiscal 2018, equating to total sales growth of 3.6%. We are more optimistic, and expect sales to accelerate at The Good Guys and JB Hi-Fi Australia from 2.9% and 2.7% sales growth, respectively, in July 2019. We consider the new sales incentives at The Good Guys to be a tailwind and project the impact of sales brought forward into June 2018 due to the Soccer World Cup to abate at JB Hi-Fi. We forecast group sales to increase by 5.8% to AUD 7.25 billion in fiscal. Over the next decade, we expect average group sales group of 4% and EBIT margins to hover around current levels of 5% as competition keeps a lid on gross margins. The group’s fiscal 2018 net profit after tax of AUD 233 million was slightly ahead of our AUD 230 estimate and in line with the latest guidance of about AUD 230 million. Group sales of AUD 6.85 billion were in line with guidance and our estimate. Group EBIT of AUD 351 million was in line with our estimate.