The demise of electronics retailer Dick Smith has supercharged the profits of its major competitor, JB Hi-Fi, which outdid all expectations to record an impressive 11.5 per cent improvement in net earnings on an 8.3 per cent jump in sales.
Investors were stunned and sufficiently impressed – and immediately pushed the share price up more than 7 per cent.
JB Hi-Fi’s results
Elizabeth Knight looks at JB Hi-Fi’s results that came out today.
And the positive fallout from Dick Smith is set to continue in the first half of the new financial year as JB Hi-Fi grabs a bigger wedge of market share in computers, visual, audio and accessories.
It cemented its improved market share through the crucial May and June months with aggressive marketing and discounting.
In July – the first month of the 2017 financial year – sales are already up 13.4 per cent on July last year. The company expects sales for the full year to increase 7.6 per cent.
JB Hi-Fi acknowledges the sales adrenalin it is getting from the Dick Smith factor will wear off next year.
But the Dick Smith legacy has certainly enhanced JB Hi-Fi’s already ambitious growth plans, which include finishing the rolling out of 75 HOME stores (that offer larger appliances) by 2018.
Meanwhile, JB Hi-Fi remains in a two-horse race to acquire The Good Guys retail chain for about $800 million – a move that would boost its store footprint to about 300.
The competition regulator last week gave the company the green light to stay in the race for The Good Guys but shareholders will not want management to overpay for the business.
Whitegoods and electronics have been something of a ray of sunshine for retail, which has been struggling in several other categories. Australian retail sales inched up a tiny 0.1 per cent in June, according to the latest figures from the Australian Bureau of Statistics, missing analysts’ expectations.
JB Hi-Fi’s financial results demonstrate clearly that the company has defied the lacklustre retail environment. During the past five years it has also defied the sceptics that said its business model was under pressure thanks to its then-reliance on DVDs and CDs.
JB has evolved its product range but retained its low-cost model. It has also managed to increase the gross retail margin.
Online retailers have not devastated their bricks-and-mortar competitors and the multi-channel distribution model has found success.
JB Hi-Fi has grown its online sales more than 30 per cent in 2016 but they remain a relatively modest 3 per cent of total sales.
Management noted the home appliance market in Australia is circa $4.6 billion– larger than any other of the categories JB Hi Fi operates in.
Meanwhile, unlike Dick Smith JB Hi-Fi avoided moving into the house-brand generic products, instead retaining its house-of-brands status. It could be argued that Dick Smith’s fateful decision to amp up house brands provided JB Hi-Fi a free kick well before Dick Smith was closed down.
The question JB Hi-Fi investors need to answer is whether the rate of growth can be sustained after the Dick Smith benefits have washed through in 2018.
The addition of new stores will provide plenty of sales momentum – although that won’t have an impact same-store sales growth.
In a general sense retailers such as JB Hi-Fi are heavily reliant for growth on product innovation by their suppliers. For example, the wearables technology craze will have boosted sales.
It needs the likes of Apple and Samsung to continue to excite consumers with new gadgets to whet their appetites.
Whether there is some new, must-have product to excite customer demand in a year or 18 months is unknown. Neither can we get any sense of what the external economic environment will look like in the medium term.
Perhaps the biggest single factor on the medium-term horizon is whether JB Hi-Fi will win the contest to buy The Good Guys.
JB Hi-Fi shares have risen 40 per cent to a record $27.38 this year, fuelled, in part, by expectations it will acquire appliances chain The Good Guys.
There are others in the race, including private equity players and a new public listing.