JB Hi-Fi ultimately proved to be one of the COVID-19 winners even though its share price was trashed at the start of the pandemic when a heavy sell-off across the broader sharemarket meant it lost 40 per cent of its value in a couple of weeks to sink to $24.29.
Fear gave way to pragmatism and home cocooning. Spending on the home spiked as people upgraded big-screen televisions, bought new kitchen appliances and spent up on home work-station technology as the at-home lifestyle was forced upon them. The stock recovered strongly.
By March this year its shares had climbed to $55.85. But then a third of its sharemarket value vanished in less than three months as many investors decided this would be as good as it gets, and the dream run may be over.
Sharemarket investors traditionally look nine to 12 months ahead. Crystal ball gazers peering ahead to early 2023 see a household sector grappling with much higher mortgage costs after sharp interest rate rises, soaring energy bills and petrol prices and confidence low as house prices slide.
JB Hi-Fi isn’t giving up, and showed again on July 19 when it released preliminary financial results for 2021-22 just how resilient the business is.
The core JB Hi-Fi brand and The Good Guys appliances stores are exceedingly popular with shoppers. Overall, group revenue rose 3.5 per cent to $9.3 billion from a year ago, underpinned by strong same-store sales growth of 10.9 per cent in its Australian business in the June quarter.
It navigated the COVID-19 pandemic with aplomb, with its online business roaring ahead, up 50 per cent for the year.
But might Australia’s obsession with real estate and the central role a steadily growing residential housing market plays as a bedrock of the economy finally bring a partial unravelling?
Jarden analyst Ben Gilbert says the market seems to have already factored in hefty house price falls, which are a substantial drag on confidence because of the household wealth effect.
“The market appears to currently be pricing a scenario whereby house prices fall greater than 20 per cent and spending falls 10 per cent-plus for household goods,” he said.
Economic data is already showing a slowing in consumer spending. Mr Gilbert says there is no doubt that JB Hi-Fi is an “industry leading retailer” but it is facing growing headwinds.
He has an “underweight” rating on the stock and a 12-month price target of $34.90. JB Hi-Fi shares closed on Friday at $44.46.
Mr Gilbert expects September quarter sales on a like-for-like basis to still be ahead of the same time a year earlier, when Sydney and Melbourne were in extended lockdowns and bricks-and-mortar retailing was severely curtailed. But from then on, it will be cycling much tougher sales and profit levels on a comparative basis.
He also points to rising competition from retailers such as Bunnings and Kmart, and online businesses such as Amazon which is steadily building a bigger presence in Australia with wider ranges.
JP Morgan analyst Bryan Raymond has a “neutral” rating on the stock and a 12-month price target of $44. He says it has a resilient business model and that The Good Guys results in the six months to June 30 were particularly impressive.
But he, too, points to a tougher outlook for discretionary retailers as “significantly higher cost of living and a slowing housing market weigh on spending”.
Goldman Sachs analyst Lisa Deng has a “sell” rating on the stock and thinks it will sink to $34.90 within 12 months. She said the trading update showed better-than-expected margins but expects pressures to build in this new financial year as the business faces both “cyclical and structural challenges”.
UBS analyst Shaun Cousins is sitting on the fence and has a “neutral” rating and a 12-month target price of $42. He said there was caution among investors about how retailers such as JB Hi-Fi, which have “broadly enjoyed COVID tailwinds, will perform under more difficult conditions”.
He adds that The Good Guys has gained market share and is delivering stronger sales and higher margins after improvements to its merchandise, range and in-store selling.
Citi analyst Adrian Lemme is a believer and has a “buy” rating on the stock even though he trimmed his 12-month price target to $47 from $52. Mr Lemme said JB Hi-Fi was a strong operator and well-positioned to withstand the drag from increasing cost-of-living pressures in households.
The discretionary retailing sector was “unloved” and on a risk-reward basis JB Hi-Fi was looking more favourable for investors after its share price dropped by one third between March 30 and mid-June, suggesting investors had already factored in a tougher outlook.
