JB Hi-Fi's JBH sales growth is outperforming. Rising Australian household incomes, market share gains, and a bolt-on acquisition supported group 10% sales growth in first half fiscal 2025. However, earnings growth lagged. Net profit after tax increased by 8% to $285 million on first half fiscal 2024. Following results the shares fell close to 5% but are up 71% in the last year.

Why it matters: JB Hi-Fi's sales growth exceeded our expectations. We suspect JB Hi-Fi took share from its largest Australian competitor, Harvey Norman. But despite strong top-line performance, normalizing competitive intensity constrained Australian profit margins.

  • Group pretax margins of 7.2% are well below their recent peak of 8.9% in the first half of fiscal 2023. We expect moderating sales growth and intense competition from online retailers like Amazon to shave another 70 basis points off JB Hi-Fi's pretax margins by fiscal 2027.

The bottom line: We increase our fair value on no-moat JB Hi-Fi by 7% to $44 largely on a 6% uplift of long-term sales levels, and time value of money. At current prices, shares are materially overvalued. We think this represents our more cautious outlook for maintainable operating margins.

  • While we expect JB Hi-Fi holds onto its newly acquired market share gains, we expect pretax margins moderate to long-term maintainable levels of around 6% by fiscal 2027. All else equal, we estimate pretax margins would need to expand to 15% to justify current prices, from 7% in fiscal 2024.
  • We forecast soft earnings growth over the medium term, with mid-single-digit sales growth barely offsetting weakening profit margins from fiscal 2026. At our fiscal 2028 earnings per share estimate of AUD 4.29, current prices suggest a P/E of 23.

Big picture: E-commerce is outperforming in-store retailing. We expect this structural trend to continue over the next decade. Retailers with strong online platforms like JB Hi-Fi, and online pure plays like Kogan are likely to benefit.

Busines 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.

JBH 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.

JBH 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.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

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 more about how to identify companies with an economic moat, read this article by Mark LaMonica.