JB Hi-Fi: FY21 result - Making hay
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 17 August 2021, 8:00 AM
- Sectors Covered:
- Gaming and Retail
- JB Hi-Fi (ASX:JBH) benefitted from the strength in demand for consumer electronics and home appliances during FY21 to record double-digit LFL growth in every division, complemented by strong operating leverage to drive EBIT up 53.8%.
- LFL sales growth was negative in the first few weeks of FY22 to date, reflecting extremely strong trading at the start of FY21. Despite this, the LFL performance compared to FY19 was positive, especially in The Good Guys.
- Our estimates are largely unchanged. At the group level, we forecast a (6.2)% LFL sales decline in FY22, with EBIT falling 23.5% yoy. We retain a HOLD rating.
Record sales growth and positive operating leverage
Sales were 12.6% higher yoy, combining with a 78 bp improvement in gross margins and good control of operating expenses (CODB rose only 4.0%).
The headline performance metrics were pre-announced on 20 July. There were points of interest, nonetheless, in discussions around current trading trends, the future trajectory of gross margins and working capital dynamics.
LFL sales holding up well against tough comps
Sales trends in the first few weeks of FY22 reflected JB Hi-Fi’s extremely strong start to the prior year. JB Hi-Fi Australia reported (14.9)% LFL sales decline in the period from 1 July to 15 August 2021, which, against a +44.2% comp in the first seven weeks of FY21, was a resilient performance.
LFL sales growth against FY19 was 19.4%. The performance of The Good Guys was even more robust, with an (8.6)% LFL decline in FY22 YTD flowing through to a 28.2% 2-year stack.
Gross margins impressive, but will come under pressure in FY22
JB Hi-Fi’s gross margin rose by 78 bp to 22.18% in FY21. Each division increased its gross margin, but The Good Guys was a particular highlight, with a 189 bp improvement driven across key categories including refrigerators, vacuums and coffee makers. A combination of heightened customer demand and limited stock availability meant there was little need for discounting during the year.
JB Hi-Fi reports that discounting is now starting to come back into the industry, which we believe we lead to a degree of gross margin normalisation in FY22. We forecast group gross margins of 21.58% in FY22, down 59 bp, but still 19 bp above FY20.
Working capital will build further in the current year
The inventory position largely normalised from the exceptionally low position at the end of FY20 as availability improved and JB Hi-Fi replenished depleted pipelines. This combined with a reduction in payables to create a substantial working capital build, resulting in a 43.1% reduction in operating cash flow to $558.7m.
We expect a further small inventory build and a further reduction in payables in FY22. This will by no means put pressure on the balance sheet, though, which we believe remains under-geared. Excluding lease liabilities, JB Hi-Fi was in a net cash position of $263.2m at the end of FY21.
We’d hold onto JBH; we don’t see a compelling catalyst to buy just yet
This was a high quality result from a high quality retailer. Nothing in the result suggested the business will be unable to navigate ongoing trading volatility caused by COVID-related temporary store closures. JB Hi-Fi’s multichannel model gives it the flexibility to service customers online and in store without undue perturbation.
That said, we expect LFLs to track negative throughout FY22, with the gross margin coming under some pressure. We retain a HOLD recommendation in the absence of a compelling catalyst to cause the market to ascribe a materially higher valuation to JB Hi-Fi. Our estimates are largely unchanged. Our price target rises by 3% to (login to view) as we roll forward our valuation by 12 months.
JB Hi-Fi has a strong balance sheet. Should it choose to deploy capital on value-enhancing M&A (or dial-moving capital management), the stock could perform better than we assume.
JB Hi-Fi performs relatively well in lockdowns, but it performs better outside them. Prolonged lockdowns in NSW, Victoria and elsewhere beyond current expectations could see earnings fall short of our forecasts.
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