Sales at JB Hi-Fi have slipped almost 2% as tough conditions bite.

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The retailer today announced sales were down -1.8% on last year, across Australia and NZ stores for the five months to 30 November, blaming heavy discounting and tightening margins as the retail sector continues to suffer.

Overall sales rose 7.8% although this fell further to 6.5% including Clive Anthonys branded stores, suggesting the brand is acting as a drag on growth.

“Sales in the second quarter have improved but unfortunately not enough to counter the impact of the first quarter decline in sales and margin driven in large measure by a high level of discounting in the market, with some retailers pricing inventory below cost to drive foot traffic and/or clear excess inventory,” JB Hi-Fi CEO Terry Smart said.

Price deflation on TV’s are now running at 20% – 25% annually, it said, which is good news for consumers, but not so good for retailers battling it out for market share.

However, volume growth in the number of TV panels sold has been “positive” up 15% on a comparative basis.

“Pleasingly we continue to see market share growth in both dollars and units” in the sector, the retailer said in a statement today.

JB has also had strong growth in PC, IT and accessories category although phones went “soft” in the first quarter but is now showing “solid growth” with the introduction of the iPhone 4S.

Music and DVDs are performing well and and market share is up, while on the gaming front was down on a comparative basis due to continued declines in Nintendo Wii & DS sales, is seeing good sales in the PS3 and Xbox.

Online sales were also described as “strong” up 80% on the prior period, crediting the jump to services like “pick up in store, factory scoop and direct imports.”

“With our high number of unique visitors we continue to drive both in store and out of store sales,” it said. The online store enjoyed average visitors numbers of 934,000 per week.

It also referred to its newly launched JB HI-FI NOW, music streaming service, which has been met with “positive” reviews.

However, despite this, JB has now downgraded earnings for the first half 2012 by 5% below H1 last year. The earnings decline will result in earnings per share (EPS) being approximately 1% below last year, it confirmed.

It also said despite the blip in sales, it remained forcused on growth for 2012.

“We remain focused on our low cost of doing business while ensuring our longer term sales growth objectives are met by continuing to provide the right balance of customer service levels and labour productivity.”

However, this is subject to the Christmas trading performance being in line with recent months’ trends.

“We have seen some positive sales trends in October and November. Combined with both the continued growth in the Computer and IT categories and the recently opened stores we hope to continue to build on this momentum into the second half FY12.

Christmas trading has started to build “momentum” it said today, and JB Hi-Fi is “well positioned to take advantage of the busy trading period due to our large assortment of gift giving merchandise.”

“We maintain our FY12 target of 16 new JB Hi-Fi stores with 10 stores already opened prior to the important Christmas trading period and we are on track to open the balance of 6 stores in the second half of FY12.”

In total, it hopes to have 214 JB Hi-Fi stores open in the next 4 to 5 years.

“The market remains challenging but we continue to gain market share, leveraging our highly productive stores and a low cost structure. Our unique brand proposition provides consumers with not only low prices but also an entertaining and engaging shopping experience,” Smart added.

“Consolidation in the consumer electronics and home entertainment sector is inevitable and is likely to accelerate over the short term with JB Hi-Fi a likely primary beneficiary of this trend. Combined with our new store roll out program, we should continue to enjoy total company sales growth and entrench our position as the leading retailer in this sector.”

The retailer will release its half year results on 13 February 2012.