JB Hi-Fi earnings provide insight into consumer spending
Declining sales point to softening consumer demand and lower near-term profits.
Mentioned: JB Hi Fi Ltd (JBH)
JB Hi-Fi (ASX: JBH) is one of Australia's largest retailers and provides a window into consumer spending in Australia. The company reported results off the backdrop of household spending declining in NSW and Victoria over the previous 12 months according to CBA’s household spending insights measure released on August 14th.
Overall, the results were positive according to Morningstar’s Director of Equity Research Johannes Faul. JB Hi-Fi outperformed its peers and gained market share in the consumer electronics and home appliances market despite overall industry retail sales declining by 2% in fiscal 2023 according to the Australian Bureau of Statistics.
Faul raised his fair value estimate for no-moat JB Hi-Fi by 3% to $36.50 per share. Underlying fiscal 2023 EPS of $4.76 was 13% better than Faul’s expectation. He expects JB Hi-FI to retain these market share gains and lifted his sales estimates by 3%, driving the upgrade to his fair value.
Combined Australian sales for JB Hi-Fi and The Good Guys increased by 4% which was significantly ahead of the industry average. Faul estimates system sales of Harvey Norman’s Australian franchising operations declined by 4%. Measured by sales, Harvey Norman is Australia’s second-largest consumer electronics retailer behind JB Hi-Fi.
However, Faul continues to expect JB Hi-Fi’s profit margins to revert to maintainable levels reflecting the lag effect of rising costs of doing business. Wage and rent rises are poised to reduce consumer price inflation from fiscal 2023’s 7%. Further, he expects gross margins to deteriorate with increasing competition—intensified by improved supply chains and normalising consumer demand from pandemic peaks.
It may be a challenging year ahead for JB Hi-Fi. Although operating profit margins held up better than expected during the second half of fiscal 2023, Faul forecasts a material decline in earnings in fiscal 2024. He estimates a mid-single-digit decline in sales coupled with rising costs—including wages, rent, and energy—to drive significant pressure on operating margins. For the month of July 2023, Faul calculates that JB Hi-Fi’s Australian sales declined by 5%.
He expects fiscal 2024 EPS to decline by some 30% versus the previous corresponding period. By fiscal 2025, Faul anticipates consumer demand to have normalised, and from then for JB Hi-Fi’s cost base to have increased broadly in line with annual sales growth, averaging 4%.
The shares are up slightly since reporting results on Monday August 14th and are trading in overvalued territory compared to Faul’s fair value estimate. The share are currently trading 37% above the fair value.