JB Hi-Fi’s (ASX: JBH) trading momentum keeps on improving—beating our prior expectations. Its Australian sales grew in the June 2024 quarter compared with the previous corresponding period. This is the first time Australian quarterly sales increased on the prior corresponding period (“PCP”) since December 2022. On average, no-moat JB Hi-Fi is outperforming its peers.

According to the Australian Bureau of Statistics, retailing sales of electrical and electronic goods declined by 1% in the June 2024 quarter. We calculate JB Hi-Fi’s Australian sales increased by 3%—a delta of 4 percentage points.

We increase our fair value estimate by 9% to $41 on a 4% uplift of long-term sales levels, slightly higher midcycle operating margins, and the time value of money. At current prices, shares screen as materially overvalued. We think this represents our more cautious outlook for maintainable operating margins.

In line with our expectations for an acceleration in domestic retailing sales in fiscal 2025, JB Hi-Fi’s Australian sales grew by 5% in the month of July. We forecast rising wages and fiscal stimulus to underpin better trading conditions in fiscal 2025 relative to a difficult fiscal 2024, overshadowed by cost-of-living pressures. Although management cautions it is lapping a relatively weak start to its fiscal year in the PCP, we now estimate JB Hi-Fi’s underlying group sales to grow by 2% in fiscal 2025, up from our prior estimate of a 1% increase. This compares with virtually flat sales in fiscal 2024.

JB Hi-Fi is buying a 75% stake in e&s, a seller of premium kitchen, bathroom, and laundry appliances, for $48 million. We expect the small acquisition to add 2% to underlying sales growth in fiscal 2025, resulting in our estimated 4% sales growth for the group. We also expect stronger near-term gross margins, before competitive pressures drive pretax margins to our long-term estimate of around 5.7% by fiscal 2027, from 6.5% in fiscal 2024.

Business strategy and outlook

JB Hi-Fi is one of Australia's largest retailers, having built a strong brand and market leadership within the consumer electronics industry, after the demise of smaller players, and more recently of major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

Competitive advantage comes from JB Hi-Fi's low-cost business model, similar to listed US peer Best Buy. Price deflation and intense competition are longer-term risks. Stores typically break even in just less than a year, with mature stores on average contributing over $20 million in sales.

The business doesn't run warehouses and holds all stock at the store level, minimizing storage and transport costs; The Good Guys' Big and Bulky Goods distribution centers are transitioned into Group Home Delivery Centers. The business model requires high turnover and foot traffic to compensate for low operating margins on consumer electronics, home appliances, and software. Despite this, we still don't think the business carries any economic moat.

Consumer electronics are commoditized products, and technology keeps converging. JB Hi-Fi needs to offer appealing incentives to attract mobile phone customers, given the highly fragmented market. Consumer electronic margins will also be affected by price deflation resulting from intense competition. Management openly advertises that its employees are incentivized and can often sell at cost to close a deal, sacrificing gross margin.

Moat rating

JB Hi-Fi lacks an economic moat. The Australian discount electrical retailer has over 300 JB Hi-Fi and The Good Guys branded stores across Australia and New Zealand. JB Hi-Fi branded stores are typically relatively small and located in high-foot-traffic areas. The brand has resonated well among consumers as a differentiated youthful brand offering value and convenience. However, competitors have realigned their strategy to offer similar levels of discounts and store appeal. The demise of Dick Smith has removed a competitor, but we expect competition in electronics retailing to remain significant, especially from online pure plays like Amazon, Kogan, and Catch.

Online retailers operate in an environment of very low fixed operating costs, with technology providing a 24-hour shopfront and no need for expensive leases or sales staff. The lower operating cost enables digital retailers to deliver products at a compelling price and offset JB Hi-Fi's scale advantage. JB Hi-Fi’s offering is also not differentiated enough to justify selling products at a premium retail price. The company competes on a global stage in online, with the distinct disadvantage of corralling a domestic population of around 25 million, compared with those from the US, servicing more than 330 million.

We expect an increasing proportion of consumers will shift to online shopping and see this as a structural headwind for omnichannel retailers including JB Hi-Fi. Branded technology has become commoditized, and we see consumer electronics as one of the most exposed categories to channel shift. With online penetration of 35% in 2022, according to Euromonitor, we think e-commerce has significant headroom to take share in Australian consumer electronics based on higher penetration in comparable markets, such as the US around 72%, as per Euromonitor, the UK at 69%, and Germany at 42%. Amazon Australia will be a driving force underpinning digital migration. For instance, the mega warehouse under construction in Melbourne, mirroring its already operational Sydney automated fulfilment center, will add an estimated $3 billion in sales capacity, or 9% of nongrocery e-commerce.

JB Hi-Fi bulls say

  • Consumers are more likely to turn to trusted, value-oriented brands during periods of uncertainty, providing JB Hi-Fi with a degree of insulation from economic downturns.
  • JB Hi-Fi has developed a national network, strong brand, and customer loyalty.
  • The business has cemented itself as a category killer, similar to Bunnings in hardware.

JB Hi-Fi bears say

  • Comparable sales growth weakens as consumers tighten their wallets during economic slowdowns.
  • JB Hi-Fi does not have a moat and sells commoditized products.
  • Online competition increased significantly with the arrival of Amazon. Looking ahead, we expect the online channel will grow faster than brick-and-mortar electronics retailing, meaning pure-play businesses like Catch Group and Kogan are likely to take market share.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

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