Over the long-term, JB Hi-Fi Australia has delivered close to 5% comparable sales growth. The company’s ability to alter its product range as well as drive more premium products has been a hallmark of its success. The company now faces a tougher demand backdrop given price inflation in some key categories combined with deflation in others from a higher Australian dollar. What does it all mean? Volumes for electronics will slow given the retail cycle is slowing as well as the consumer response to higher prices. Even so, the company should deliver sales growth. We see comp sales troughing at 2.7% in FY27e with a return towards 3% beyond FY27e.

JB Hi-Fi reported FY25 EBIT of $708 million, excluding significant items. Operating profit growth of 9% was solid and largely reflected good sales trends in the year. While the housing cycle may improve, the more important driver of its sales outlook is price inflation, which is falling away. We expect sales growth of 3%-4% for JB Hi-Fi Australia and The Good Guys. The EBIT margin profile is likely steady going forward because a higher portion of sales growth will come from low margin businesses and wage and rent cost growth will remain elevated.

JB Hi-Fi reported 1H25 sales growth of 10% and EBIT growth of 9%. Impressive top line growth was hampered by a decline in gross margins and elevated operating cost growth. While good sales trends should continue, the results provide a reminder that gross margin declines are a risk and operating leverage is low. The company’s large cash position does bode well for further special dividends. While dividends and cash flow are attractive to some investors, the valuation remains steep in our view. 

JB Hi-Fi’s share price indicates the market has firm expectations that good earnings growth will continue. We explore some of the arguments trying to justify the lofty valuation. Electronics categories are not defensive. Price deflation is common and replacement cycles vary. Just under half JB Hi-Fi’s outsized earnings growth over the past five years is a function of market share gains that will be harder to sustain.

Australian retail sales rose 1.3% in March 2024 (0.8% seasonally adjusted). Given the timing of Easter, judging the results is problematic. However, seasonally adjusted data and our own feedback reinforces the view that sales trends remain weak across March-April. Per capita retail volumes fell 2.3% in the March 2024 quarter. Additional category detail shows weakest underlying trends in electronics, furniture, recreational goods and clothing. We expect very weak trends to persist through to June 2024 with a mild pick up for the back-half of calendar 2024.

JB Hi-Fi reported FY22 EBIT growth of 7%, with 2H22 EBIT rising 33%. Sales momentum has strengthened slightly in July 2022 and the first-half of FY23e should see good earnings growth. Based on our analysis, it is calendar 2023 where sales could fall and profit margins decline. We are increasingly cautious on the stock given sales trends are likely to turn negative in calendar 2023.

Link to report