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JB Hi-Fi slams the short sellers

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A few months back, JB Hi-Fi was the most shorted stock on the Australian share market with more than 17% of its ordinary shares sold short. Professional investors had taken the view that the profits of Australia’s specialty retailers such as JB Hi-Fi, Harvey Norman and Super Retail Group were going to be decimated by the arrival of Amazon and its category killing offers and logistics knowhow. While market share loss would be small in the short term, the profit impact would come as the retailers responded to the competition by slashing prices, thereby crushing margins.

To add to this bearish flavour, the Australian Bureau of Statistics was reporting that retail was on the skids. A horror first quarter of the financial year saw total retail turnover in Australia fall by 0.2% in July, fall again in August by 0.6%, before a small rise of 0.2% in September.

JB Hi-Fi shares were smashed, falling to a low of $21.64 on 24 November.

                                    JB Hi-Fi - 1/17-1/18 (source: CommSec)

But Amazon finally launched on December 5, didn’t conquer but instead underwhelmed……..and the ABS discovered that retail trade was growing! The first quarter’s weak performance was followed by a rise of 0.5% in October and a staggering increase of 1.2% in November. Accompanying this news were big increases in both consumer and business confidence.

The shorters started to cover, a couple of the broker analysts turned more bullish, and the rest is history. One of the best performing stocks on the market in January, JB Hi-Fi closed last night at $29.23.

While the shorters have been stung badly, they haven’t entirely given up the ghost. The latest figures from ASIC yesterday showed that there were still some 16.65 million JB Hi-Fi shares short sold, 14.5% of the total number of ordinary shares.

First half profit

JB Hi-Fi is due to report its first half profit on Monday week, 12 February. It hasn’t provided a profit forecast per se, but has forecast total group  sales to be circa $6.8bn for the full year, with $4.65bn coming from the JB Hi-Fi chain and $2.15bn from The Good Guys. For the JB Hi-Fi branded stores, this translates into sales growth of 6.4% pa.

At its AGM in October, the company reported that year to date sales growth for the JB Hi-Fi business was 6.2%, and for Good Guys 3.1%. Management reaffirmed full year guidance.

In terms of profitability, the market is forecasting that JB Hi-Fi will earn around $145m for the first half, compared with $125.4m in the first half of FY17. The increase is in part due to a full six month contribution from The Good Guys business (the acquisition was completed in November 2016). On an earnings per share basis, the market is forecasting that JB Hi-Fi will lift this on a full year basis from an underlying 186.0 cents per share in FY17 to 208.2 cents per share in FY18, a growth rate of 11.9%.

While EPS growth is well above the sales growth rate, JB Hi-Fi has a strong track record of reducing its cost of doing business. It is also leveraging synergy benefits from the Good Guys acquisition. Provided that the gross margin holds up, profit growth in the order of 12% is achievable.

What do the brokers say

The major brokers are in two camps. There is the camp led by Citi and Credit Suisse who think that Amazon is going to have a very material impact on profitability and accordingly, have low stock price targets and sell recommendations.

The second camp says that JB Hi-Fi is responding very credibly to the Amazon threat, that JB Hi-Fi is an exceptionally well run retailer and that the stock is cheap. Four brokers have raised their price targets in January.

Overall, the consensus price target is now $27.33, 6.5% below last night’s market close. Individual broker recommendations and targets are detailed in the table below.

            Broker Price Targets & Recommendations (source: FN Arena)

In terms of multiples, the brokers have JB Hi-Fi trading on a forecast multiple 14.0 times FY18 earnings, and 13.5 times FY19 earnings. The yield is an attractive 4.6% (plus 100% franking).

Bottom Line

While I am a huge JB Hi-Fi fan (it is unquestionably the best run retailer in Australia) and the stock it is still cheap on the multiples, every stock has its price. If JB Hi-Fi gets into the thirties, I am going to taking some profits.

Amazon hasn’t gone away and over the medium term, its presence in Australia will put pressure on the margins existing retailers can earn.  The short sellers might be in retreat at the moment, but they will look to re-set their positions because their fundamental view on retailing hasn’t changed.


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Published: Thursday, February 01, 2018

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