JB Hi-Fi Leads Retailers, First Half Profits Up 7.6%

The demise of Dick Smith gave retailers an extra boost last year. Additional sales were expected for JB Hi Fi [ASX:JBH] and Harvey Norman Holdings [ASX:HVN]. A closing down Dick Smith was only benefiting the two retailers. A Citi Group broker suggested early this year that Dick Smiths close down could deliver earnings up lift of $19 million for JBH.

He was wrong on the exact figures. Yet the Citi Group broker had the right idea. This morning JBH announced half year gross profits were up 7.6% to $95.2 million. JBH CEO, Richard Murray, said ‘this was a solid result with trading in the important November and December periods particularly strong as we executed on a great promotional plan.

However I believe it had more to do with Dick Smith’s demise rather than executing a great promotional plan. Never the less JBH was able to pump up total sales by 7.7%. And just to show shareholders their appreciation, JBH also increased interim dividend by 4%.

Investors are sure to be happy about the solid figures for first half FY16. But the good news keeps on coming. January sales are already up compared to last year. Sales growth has jumped 10.2%. Murray commented on sales for the first month of the year, stating:

Sales in January 2016 were pleasing given the strength in the prior year, with back to school technology purchases in both our retail and Solutions businesses driving sales.

This is unusual for retailers. If we look historically at business performance after the holiday cheer is over, small businesses and retailer aren’t the best performers. But why does this happen in January? It’s because consumers are getting over their post-holiday shopping hangover.

There are a lot of strategies that retailer do to combat this sluggish sales period. One strategy is to cater to your target audience. And JBH has done this exceptionally well. JBH has increased their inventories of home appliances. Why? Because the home appliance market is big, $4.6 billion big. JBH has also rolled out many new JB HI-FI HOME stores. With the emphasis pertaining to electronics for the home.

Murray restated JBH’s focus on their HOME stores if it wasn’t clear enough to investors by stating,

We continue with a strong investment program including rolling out JB HI-FI HOME, the introduction of small appliances to existing stores and upgrades to a number of our stores. This will position us well as we cycle a strong second half of the prior year,’ Murray said.

Guidance’s for FY16 were also promising. The market is still expected to remain competitive with a slight change. Dick Smith is no longer a major threat. Total sales are expected to be around $3.9 billion and NPAT to be in the range of $143–147 million.

What to do about JB Hi-Fi’s share price

Many companies have been battling this year. They’re battling to create value for shareholders. But JBH is not one of these companies. JBH’s shares are up 10% this year, dominating competitor HVN, whose share price is barely breaking even.

JBH HVN ASX Share Price

Source: Yahoo finance

Both however have profited off Dick Smith closing 100 stores, but the industry is changing. Consumers are now more willing to shop online in the comfort of their homes. This is even happening to JBH. Sales from online shoppers grew by 28.9% in HY16.

So if JBH wants to stay dynamic in future they’ll need to focus on out of store customers rather than rolling out expensive new outlet stores.

Härje Ronngard,

Junior Analyst, Money Morning

PS: JB Hi-Fi could be a good investment going into 2016. However it’s probably not the only one. According to Money Morning’s Publisher Kris Sayce there are five great ASX stocks for 2016. Spending hours upon hours to look through financial reports and price chart is discouraging. That’s why Kris has done the hard work for you.

In Kris’s report ‘The Five Best ASX Stocks For 2016’ he will show you why his five picks are a buy.  Kris will show you a sneaky way to play the Australian property market. And he’ll also tell you why retailers, like JB Hi-Fi, are in for a revival.

To get your free report today, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia