JB Hi-Fi When 29% Growth Isn’t Enough
JB Hi-Fi Limited (JBH) announced 29% growth in profits, yet the stock has been taken out to the woodshed and had 5% flayed off its hide.
Why were investors so disappointed in this Roger Montgomery favourite? Sales increased 23%, profit was up 29% and the dividend was raised a whopping 120%, hardly disapointing figures.
Do investors believe the outgoing CEO, Richard Uechtritz, was worth 5% around $100M of the market cap? The stock fell 5% today after the earnings announcement.
Or was it the falling gross margins? Gross margins fell 26bps due to increased competition and lower margin items.
Or perhaps investors are finally looking behind the growth numbers and seeing the real underlying growth doesn’t deserve such a high price tag. Comparable same store sales (SSS) were up a less than spectacular 9.9%. Worse yet, January SSS were up a disappointing 7.2%.
Too many numbers? Then let’s stand back and consider the business for a while. JB Hi-Fi have profited from the perfect storm of digitisation. They became the category killer as consumers moved from analogue to digital entertainment. Their high ROE business has allowed JB Hi-Fi to quickly expand profitably and they still see plenty of growth ahead. Now consider your own household, your friends and how many JB- Hi-Fi stores are in your area.
My answers to those questions are I’m digitised, so are my friends and too many stores. Peak growth is in the past for JB Hi-Fi and with considerable risks to the consumer in 2010 I still don’t see attractive value. Still I like to help out fellow investors so I smacked down $600 for a digital camera plus accessories at JB Hi-Fi last week. Don’t say I’m not doing my part.
JB Hi-Fi closed at $19.07 down 20% from its high of $23.71.
Disclosure: No position
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Richard Uechtritz said they have another 5 years of growth and that the current 122 stores could potentially expand to 250. He was the CEO for the last 10 years so I think him resigning is a material risk.
As you say, their peak growth is probably behind them. The PE, now at 20 is not that expensive for a growth stock. Retail is a tough area, although their model is a good one. I popped into a JBH store for the first time around Christmas last year and was impressed by their range, volume and staff.
I’m not sure if I agree with Richard Montgomery’s valuation on it. I thought about getting it with a tight stop when the uptrend was still in place but decided against it. I think WOW is better value currently at a market PE. Even WOW has lost some direction with their store strategy in the last 2 years however.
JBH might be worth buying into the current correction as a swing trade, however as the bottom of the correction is hard for me to identify, I would tend to stand aside and see where it settles (my best guess 18-19). I actually don’t have that much confidence in the underlying business model so will probably avoid. I feel the major long term problem is it is so shopping mall based for volume traffic and this is not where the future of retail is. I reckon the DVD sales will decline with internet bandwidth and they don’t have the floorspace to expand into hardware to compensate.
If Officeworks used a JBH approach, that would be a category killer.
I think Montgomery may subscribe to the Lynch philosophy of growth, i.e. it is better to pay considerably more for a company with good growth. Due to compounding that is a great strategy. There is no doubt that JB Hi-Fi has an excellent model. What I find hard to understand is why other retailers can’t emulate it. I’d certainly be very interested at $18, but right now it’s not cheap enough for me to swing at. The best I can say about JB, is it looks cheap in comparison to the market.
My reaction to JB without Richard will be the same as FLT without Skroo.
I used to live in Melb, the birthplace of JB. Back nearly 17 years ago, JB was already legendary. Why cant other retailers emulate it? Well, same things as why FLT model cannot be emulated. JB wins on a combination of selection, prices and staff knowledge/culture (the staff knows and loves their stuff. You can launch into geek talk anytime). The culture comes from top down. I am not quite sure whether the model can be replicated overseas. If I am convinced it can be replicated overseas ala FLT, then JB is priced attractively.
The advantage of JB is now even stronger because the poor and skinned uni student who grew up with it is now a high income earning professional yearning for entertainment, gadgets and toys.
Bandwidth/internet is a challenge, but consumer trends dont change overnight. Plenty of time for JB to adapt. Witness the iPhone/itunes trend, and how JB uses it to its advantage. The next adaptation is console games. The gaming and entertainment industry is massive.
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