JB Hi-Fi does it again!

Co-founder of the Switzer Report
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Long time readers of my column will know that I am a huge fan of JB Hi-Fi (JBH). Without a shadow of a doubt, it is Australia’s best retailer. So I wasn’t surprised when on Tuesday, it “pre-released” its 2022 financial results showing record sales and record earnings.

JB Hi-Fi was forced into a “pre-release” because under the rules that cover continuous disclosure, when a company realizes that its numbers are materially different to the way the analysts are seeing it, they are required to tell the market. The company’s full year unaudited net profit of $544.9m was more than 12% higher than broker consensus forecasts, and hence the early disclosure. JBH’s audited accounts will be released on 15 August.

In a Covid impacted year, sales for the year were up by 3.5%, earnings before interest and taxes (EBIT) by 6.9%, and NPAT grew by 7.7%. An improvement in gross margins, particularly with the Good Guys, drove EBIT and NPAT growth. The final quarter was strong despite steam coming out of the housing market and interest rates starting to increase, with comparable stores sales growth of 10.9% for JB Hi-Fi Australia and 7.5% for The Good Guys.

There are three things that I really like about JB-Hi-Fi.

Firstly, it has a great record of “surprising on the upside” – that is, over-delivering. It is like CSL in this area. And this result is another example – it has outperformed the market’s expectations.

Secondly, it represents a terrific investment thesis. Here are 10 points from an ‘Investment Checklist’ prepared by JB Hi-Fi’s “spin department”. No doubt a touch biased, but few would argue that they are not substantively correct:

  • Unique and relevant brands
  • Flexible business model – history of category growth and development;
  • Diverse and resilient product categories across brands;
  • Scale operator, market leader;
  • Global best in class metrics including low cost of doing business and high sales per square metre;
  • Unique team culture and unrivalled customer service;
  • Multichannel capability built around high quality store portfolio;
  • Experienced management team;
  • High return on invested capital; and
  • Shareholder return focussed – through pro-active capital management and dividend policies.

Thirdly, it is cheap. That’s a characteristic it shares with other Australian retailers, as our market just doesn’t pay up for discretionary retail stocks. But that “cheapness” affords a level of long term protection against the market’s “ups and downs”.

On a current year PE basis (announced profit of $544.9m, ASX closing price yesterday of $43.69), JB Hi-Fi is trading on a multiple of 9.3 times earnings. On FY23 consensus forecast earnings, it is on multiple of 12.0 times (the brokers expect profit to fall in FY23 as the economy slows).

And it pays great dividends. Because it is a relatively ‘capital-lite’ business, JBH has a high dividend payout ratio of around 70%. When the final dividend for FY22 is announced in August, analysts expect the total payout for the year to be $3.10 in franked dividends, putting it on a yield of 7.1%. For FY23, although profits are expected to fall, brokers tip a fully franked dividend yield of 5.4%.

How to play

JB Hi-Fi is a core portfolio stock for me. I like “best in class” and there is no doubt it passes that test. As a portfolio stock, I rarely touch it, although I did take part in the recent ‘off-market’ share buyback (because that was just too irresistible). I am a “holder” and will buy in weakness.

For traders, JB Hi-Fi is a different proposition. I think you have to start from the proposition that our market is more often “down” than “positive” on retailers, and it doesn’t take too much to get “down”, so if JB Hi-Fi has run up in price, that’s not the time to be buying it. Forget momentum trading – when the market turns negative on retailers, they get whacked very hard. Buy when it is out of favour.

  JB Hi-Fi – last 12 months

Source: nabtrade

Looking at the major brokers, they are, according to FN Arena, moderately bullish on the stock. Following the profit result, most lifted their target price, with the consensus now at $46.36, a 6.1% premium to yesterday’s closing ASX price of $43.69. Macquarie is the most bearish with a target of $40, Credit Suisse the most bullish with a target of $56.23. My sense is that in the coming months, as interest rates go up, the market will find another reason to get bearish on retailers and they will sell JB Hi-Fi,  meaning that there should be another chance to buy it in the “$30’s”. So, buy in the “$30’s” and sell in the very high “$40’s”.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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