Not Bad JB HiFi, But “Headwinds Remain”: Analysts

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Good start to the year but headwinds remain analysts warn.
That is Deutsche Bank’s latest assessment of retail giant JB HiFi’s reported FY12 sales increase of 7% yesterday, as like-for-like sales fell 1%, as did net profit (-5%) to $109.7 m, compared to FY11.

However, JB’s year end results to June 30 were broadly in line with expectations and at the top end of the NPAT guidance provided in April ($100-105m), the analysts said in a research note.

Trading improved through the year with 2H12 comp sales of 0.5% for JB stores (vs. -2.2% in 1H12).

“Today’s result revealed that gross margins in the tail end of FY12 were not as bad as feared and remained better into FY13, ” said Michael Simotas Equity Research, Deutsche Bank.

However, the analysts believe JB HiFi’s profitability will continue to deteriorate with costs likely to grow faster than sales and discounting likely to remain “aggressive.”

Read: JB Hi-Fi: Why We’re Up

“The business remains exposed to structurally challenged products and while it has overcome this previously by expanding into new segments (including IT), we have seen no evidence that there is another better category that fits with the JB format and brand.”

Gross margins have been flat for FY13 year to date but is much better than expected; however, the outlook remains uncertain, warns Simotas.

The retailer released sales guidance of $3.3b for FY13 (a 5.5% increase), and following this DB analysts increased JB’s earnings estimates by 6% in FY13 and 5% in FY14, stemming from an increase in gross margins expectations this year.

 

Deutsche Bank are placing a $10 price target on JB shares, which rose $0.53 to $9.75 after the earnings results were announced, yesterday.

The analysts are advising investors to “hold” on JB stock as it is trading more than 50% below peak levels with short interest greater than 20%.

“We believe our concerns are reflected by the share price.”

“Risks to our price target include a faster/ slower recovery in consumer spending, continued deflation and margin pressure in the AV and IT categories,” the analysts research note said.

Analysts Goldman Sachs said JB’s result as “solid”, in spite of a dip in profits and tough trading conditions, in a client note.

GS also cited positives of strong cashflow, and referred to gross profit margins which hadn’t deteriorated in July from the same period last year.

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