JB Hi-Fi: FY22 Earnings - Quality Street

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Author name:

By Alexander Mees

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Head of Research

Date posted:

16 August 2022, 7:00 AM

• Customer demand accelerated in 2H22, resulting in 10% y/y sales growth in the half. Record sales of $9.23bn for FY22 were pre-announced on 19 July. The strong sales momentum that was a feature of 2H22 carried over into the first month of FY23, and while we continue to expect LFL sales growth to turn negative as the year goes on, we think a slowdown is unlikely to be much in evidence in 1H23.
• We believe higher wage costs will weigh on margins throughout FY23. We expect gross margins to ease back as demand gradually softens and promotional and discounting activity reverts to normal. Increased selling prices, already evident in home appliances, will likely provide some protection to gross margins, however.
• We have lowered our EPS estimates by 1% in FY23 and 2% in FY24. We retain an ADD rating and (login to view) target price. JBH offers a 5% fully-franked dividend yield and good exposure to a recovery in investor sentiment towards discretionary retail.

Event

FY22 earnings result.

Analysis

No slowdown yet. Although JBH pre-announced its headline FY22 earnings back on 19 July, today’s result provided further evidence of the resilience of customer demand for its products. Across all three of JBH’s business units, sales growth accelerated as the year progressed, especially once all stores reopened following lockdown.

At the group level, sales increased by 9.9% in 2H22, having been down (1.6)% in 1H22. The momentum continued into FY23 with strong sales trends in July. Consumer spending on electronics has become increasingly resilient in recent years as the category becomes more of a consumer ‘staple’.

While we do expect LFL growth to go negative in the current financial year (we forecast group LFLs of (4.3)%), we think the decline is not likely to gather pace until 2H23. 

Rising costs will inevitably weigh on margins. Gross margins increased by 36 bp in FY23. The Good Guys led the charge with an 89 bp improvement. With labour costs rising following the nationwide Retail Award in July, JBH will inevitably see higher operating costs in FY23.

We think higher selling prices will do much to support gross margins, especially in JB Hi-Fi Australia, but greater promotional and negotiating activity is likely to see some normalisation after two years of elevated numbers.

JBH’s recent track record of overdelivering on margins is a good one, however, and if earnings continue to beat expectations, this will probably be why.

Working capital has ‘returned to historical levels’. Inventory rose by 20.9% to $1,135m, 9.5% above our forecast. The inventory build was attributed to better stock availability.

We agree with JBH’s assertion that this represents a normalisation to historical averages: we calculate a ratio of net working capital to next year’s forecast sales at 6.1%, which is well up from the past two years, but in line with the 5.9-6.1% reported in FY17-19.

Forecast and valuation update

Small trims to estimates. We have trimmed our EPS estimates by 1% in FY23 and 2% in FY24, with lower margin assumptions offsetting higher revenue forecasts. Our $602m EBIT estimate for FY23 is slightly below consensus before today’s result (Visible Alpha $609m; Factset $603m).

No change to target price. Our target price remains (login to view). This is the rounded average of our DCF and EV/EBIT-based valuations. The effect of slightly lower earnings estimates is offset by higher peer company multiples.

Investment view

We see JBH as a well-run retailer with good cost discipline, a low-cost operating model, a compelling and effective omnichannel offer, a robust balance sheet, and a strong market position. We retain an ADD rating.

Risks

COVID tailwinds abating. JBH is often regarded as a ‘COVID beneficiary’ and a material drop-off in customer demand would be detrimental to our positive view.

Price competition and inflation. Increased promotional activity and cost inflation may eventually see margins come up under more pressure than forecast.

Housing downturn. Home appliances make up a significant proportion of JBH’s sales. Demand could come under pressure in a housing downturn.

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