JB Hi-Fi reported FY24 EBIT down 16%. Sales momentum and margins were encouraging in the second-half and the company has consistently gained market share over the past five years. We expect another year of softening margins, albeit overall EPS should be up slightly in FY25e. While JB Hi-Fi is clearly a well-run business, we expect future earnings growth is likely to be low single-digit at best.

JB Hi-Fi reported 1H24 sales down 2% and EBIT down 19%.  While a weak result year-on-year, profitability is well up on four years ago and on a normalisation path. Sales declines have abated more recently, but weak sales are likely for at least 12 months in our view. Gross margins are likely to soften further and operating cost growth will remain elevated. As a result, there is limited earnings growth over the next three years.

JB Hi-Fi provided a FY22e trading update with consistently strong sales and better gross margins in 2H22e. EBIT was 9% ahead of our forecast. The strength in sales, tightness of inventory and price rises make us more bullish in the near-term (FY23e) but more cautious on FY24e. With a net cash position, good dividend yield and low PE, we expect the stock to perform well.

There is much to debate about when retail sales slow, how far sales drop and how much margin downside will be associated with the sales weakness across the sector. We think the central driver of the debate is how quickly and far interest rates rise. In our base case (67% probability), the RBA reaches 2.5% cash rate by December 2022. In our downside case (33% probability), the cash rate reaches 4.5% by June 2023. There is downside risk to earnings for retailers over the next 18 months. We expect a volatile 12 months and advocate caution.

While retailers and manufacturers have grappled with a range of cost pressures already, wage cost pressures are only starting to build now. In Issue 3 of Price Watch, we analyse the size and scope of likely wage pressure facing companies. As most retailers are inextricably linked to broader wage-setting mechanisms, we may see an additional 2%-3% higher annual wage inflation over the next two years. The companies with the highest sensitivity to wage inflation are Inghams, Costa Group, Coles and Woolworths.

JB Hi-Fi provided a sales update revealing accelerating sales trends in February and March 2022. Given the high sales hurdle from last year, the trends are impressive and set the company up for a very strong 2H22e. We expect the sales strength to carry-on until late calendar 2022.