Investors Belt JB Hi-Fi For Bad Tidings

JB Hi-Fi shares have tanked in early trade after the retailer surprised the market late yesterday with a pre-Christmas downgrade that shattered hopes the festive season would save retailers. Shares in the electronics retailer plunged $1.96, or 13.1 per cent, to $13.04 in morning trade, falling to their lowest since June 2009. Other retailers fell sharply too, with department stores Myer and David Jones both down more than 4 per cent. Bell Potter Securities retail analyst Paresh Patel said that if JB Hi Fi is struggling other retailers must be doing worse.

“JB Hi Fi is considered the market leader with one of the lowest costs of doing business,” he said. “If they’re doing it tough, the bigger retailers with higher costs must be struggling. The market’s reaction to the the department stores may also be a result of the subdued weather,” he said, noting that the unseasonably cool and wet December weather is not good for summer sales. “If they can’t sell board shorts now than they never will be able to,” said Mr Patel.

He said the recent Reserve Bank interest rate cuts have occurred too late in the year to help 2011 sales but will provide a boost in 2012.
Shortly after the stock exchange closed yesterday, JB Hi-Fi said that while sales were broadly in line with earlier guidance, profits had been hit by steep price deflation, particularly in TV panels, which had fallen by 20 per cent to 25 per cent. The company said earnings before interest and tax for the six months to December 31 would be about 5 per cent below the previous corresponding period – the company’s first fall in profits despite adding new stores.

The chief executive of JB Hi-Fi, Terry Smart, said while deflation was normally positive because it lifted sales volumes, ”unfortunately with the category of visual, the quantum of price deflation, it’s just too hard to compensate with unit sales growth, even of 15 per cent”.
Broker JPMorgan this morning downgraded the stock, to “underweight” from “neutral”, puting a 12-month target of $14.11 on the stock.
Analysts expect JB Hi-Fi will be only the first of a wave of retailers to issue downgrades. ‘If JB [Hi-Fi] is copping it, I’d hate to think how [Woolworths-owned] Dick Smith and Harvey Norman are tracking at the moment,” one analyst, who was surprised at the timing of the announcement 10 days before Christmas, said. ”By doing it now, it shows they don’t expect a pick-up, which is pretty telling.”

Mr Smart said it was disappointing to put out an unscheduled downgrade, but while sales would increase before Christmas, ”we know where we are now for December”. ”We understand where we’re trading today, we’re confident of how we’re going to finish the month, and we need to keep the market informed,” he said. Mr Smart said that after a very difficult first quarter dominated by unsustainable discounting, there had been a turnaround. ”You do need to put it in perspective,” he said. ”In the second quarter, actually, we’ve seen a rebound. It’s just not enough. While momentum is building, it’s just not enough.”

But the analyst said it was no surprise retailers were hurting across the board, from apparel and footwear to consumer electronics. ”You just have to walk the stores to see all the promotions going on.” The analyst said JB Hi-Fi had no alternative but to match this discounting because it ”had to keep its lowest price point perception – that’s what it’s all about”. Mr Smart said JB Hi-Fi would do what was necessary to compete and ”sometimes that may mean selling some items below cost”.

The City Index chief market analyst, Peter Esho, said it would be the first time JB Hi-Fi had reported an earnings drop, despite the addition of new stores. ”The impact on net profit might be a little higher since interest on new debt – used to purchase shares on market – will flow through this year, probably towards the second half,” Mr Esho said.

He said even the best retailers, such as JB Hi-Fi, were feeling the pressure of a very challenging environment. ”New stores are helping cushion the impact but there can only be so many rolled out before the true vulnerabilities of the business model and saturation are revealed,” he said. Mr Esho said the JB Hi-Fi management was ”trying to put a brave face on what looks like being a very tough year”.

By TheAge | 16.12.2011

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