JB Hi-Fi ‘Exposed’ But Beds May Save Harvey: Analysts

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Discount retailer JB Hi-Fi continues to be exposed to adverse retail conditions, a leading analyst report has warned.
Retail has taken a battering of late, with electronics retailers in particular vulnerable to price deflation as it falls to global levels.

“JB Hi-Fi remains exposed to the most challenged categories within the electrical segment,” according to an RBS report into the retail sector, released this week.

But, “price deflation is an issue that most retailers will have to contend with in coming years as Australian price points normalise to global levels,” the RBS report says.

JB Hi-Fi shares have taken a tumble of late following its announcement last month that sales had dipped 1.8%, which it blamed on ‘high level of discounting” and price deflation on TV panels.

The yellow retailer downgraded earning forecast for the first half 2012 by 5% late last year, a move which sent investors running away from the stock.

Although share prices have stabilised and rose 1.29% today to $ 11.82, but this is a far cry from the $17 high the retailer enjoyed earlier in 2011. But investors may have got it wrong in their quick evacuation of the discount retailer.

“JB Hi-Fi’s December downgrade came months after other retailers had already downgraded their FY12 guidance. In our view, the market is unfairly valuing the balance of risks for this business,” the report states.

But two of Australia’s biggest electronics retailer have very different perspectives about the future.

 

Just this week, Harvey Norman’s outspoken Chairman, Gerry Harvey, announced he was turning his back on the Australian market and will open no new stores here and will instead focus on the Asian market, including Malaysia, and plans to open ten new stores there by the end of the year.

Read Asia Ahoy: Sulky Gerry Ditches Oz For Promised Land Here

In fact, Gerry Harvey spent much of last year closing franchises along with several Rick Hart outlets.

JB, on the other hand, has plans to open a total of six new stores this year on the back of 10 opened prior to Christmas last year and has a positve take on future growth with online sales surging and its music ‘Now’ streaming service gone live.

But further price deflation for electronics is on the cards, RBS report predicts, meaning good news for the price conscious Australian consumer but bad news for retailers struggling to make a profit in the new selling environment.

 “In the case of electrical products, this process is in an advanced stage. While there is certainly further deflation ahead in major categories, electronics products are much closer to global price points than other product categories.”

But despite this, Harvey’s share is estiamted to have grown over the last quarter, RBS believes.

Harvey Norman has pursued “creative and aggressive promotional programs over the quarter which are likely to have seen it take share in numerous categories.”

Gerry Harvey’s franchise chain may also be better insulated to price deflation that JB’s et al are facing, says the report, although higher operating costs expected in Q2 2012, which will have a negative impact on earnings, meaning more rough times ahead for the chain. 

“Exposure to furniture and bedding will likely support better underling growth relative to its peers. While our survey suggests the GP margin outcome for the electrical category appears to be reasonably stable, higher operating costs will result in EBIT margin contraction.”

 

Harvey Norman shares rose to 1.28% today to $1.98 – just half the price it enjoyed mid 2011 – and is now at one of its lowest levels, to date.

JB is to release its half year results on 13 February 2012.

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