Changes to lease accounting in 2019 have significantly changed the way leases are disclosed in a retailer’s financial results. On the surface, this may seem like only a technical accounting issue. However, in Issue 9 of The Retail Mosaic, we explain the accounting, the distortions to profit margins, cash flow and balance sheet metrics and the real world implications from lease accounting.

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.

Bapcor has disclosed a conditional indicative offer from Bain Capital at $5.40 per share, a 23% premium to the 1-month VWAP. We expect the Board will view the offer as opportunistic and may not even allow due diligence at the prevailing offer price. Bapcor’s EBITDA margins are well below US peers and its own aspirations under the Better Than Before program. While Bapcor’s realisation of cost savings has clearly been delayed, the company still believes in the long-term potential for better profit margins. We place a 25% probability of a takeover proceeding for Bapcor. A successful takeover offer will require a price over $6.00 per share in our view and Board support.

Harvey Norman’s share price is trading below book value of $3.55 per share. In this report, we analyse its property value and Franchise margins. The company has over $3.7 billion in property and an enterprise value of $4.7 billion.  The last reported cap rate on its investment property was 5.4% in FY22. By FY24e, we see the cap rate rising to 7.5%. We expect its property value to drop by more than $800 million and Franchise margins to fall below 2019 levels.

Domino’s share price has fallen a long way in 12 months. In just the past two months, the stock is down 29%. The main concern is European earnings. We agree and consensus may be 5%-10% too high for FY23e. Within the next six months, the company has enough flexibility to manage its costs and may start to see some cost recovery through pricing.