Jb hi-fi joins the club

Weakening earnings is a new thing for JB Hi-Fi. Shareholders have long been accustomed to profit upgrades rather than downgrades.

But as we argued last year, the market seemed to be factoring in a 25% profit decline over time. The reason is that the market expects JB Hi-Fi’s future to be different from its past, with maturity and increasing competition expected to take a toll.

Yesterday marked the first profit downgrade that we can remember for JB Hi-Fi. It was barely a rounding error, with management forecasting 2018 net profit of around $230m compared to the previous guidance of $235m–240m. Still, it was enough to send the stock down 9% on the day.

The Good Guys seemed to be the main problem (no surprises there, then). Same-store sales contracted 2.9% in the third quarter as unfavourable – read mild – weather hurt and price competition intensified. Of course, these issues are part and parcel with appliance retailing.

JB Hi-Fi shareholders have also become accustomed to strong sales growth from its eponymous – and much stronger – brand. Same-store sales growth for the JB Hi-Fi chain was 8.2% in the previous corresponding quarter but it slowed to 4.0% in the third quarter of 2018. With the ‘Dick Smith’ effect wearing off and Amazon shaking up the market, sales were bound to slow eventually.

There are a wide range of potential outcomes for JB Hi-Fi over the next five years, which makes it tricky to value with any precision. This explains our wide price guide, and why our Buy price equates to less than eight times forecast 2018 earnings.

If a retailer’s profits start declining it can get very ugly, very quickly, so we’ve recommended you stick strictly to a 4% portfolio weighting. We expect JB Hi-Fi to be a survivor in any industry shakeout, but margins could get crunched; we also continue to think The Good Guys was a dud acquisition.

So more share price pain is possible, and you should consider selling into any strength in the share price, particularly if it nears $30 again. But on valuation grounds, the stock is a HOLD.

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