JB Hi-Fi's FY23 results overview

JB Hi-Fi's FY23 results overview

Australian-based electronics and home appliance retailer, and consumer litmus test (not forget one of the highest quality retailers in the country), JB Hi-Fi (ASX:JBH), has unveiled its FY23 results, and it's a mix of estimate-beating gains with some slowing trends, especially in The Good Guys division. Here’s a quick dive into the numbers and what they mean for the retailer, and possibly, its shares.

Sales highlights:

Group sales: JB Hi-Fi registered impressive total group sales of $9.63 billion for FY23, marking an increase of 4.3 per cent. This figure is 1.4 per cent higher than consensus estimates of $9.49 billion.

By business segments:

JB Hi-Fi Australia: Sales increased by 5.6 per cent, reaching $6.55 billion. Same Store Sales (SSS) also witnessed a growth of 4.8 per cent.

The Good Guys: The FY23 sales for this segment recorded a slight increase of 0.8 per cent amounting to $2.81 billion, with a matching SSS growth of 0.8per cent.

JB Hi-Fi New Zealand: This segment, though a minor contributor, displayed a robust SSS growth at 11.3 per cent.

Financials:

Margins: The group's earnings before interest and taxes (EBIT) margin stood at 7.99 per cent, marking a decrease from the previous comparable period. The margins in both the JB Hi-Fi Australia and The Good Guys showed a slight increase from the previous year.

Inventory and balance sheet: The company closed FY23 with inventory worth $1.04 billion, showing a decrease of 8.3 per cent from the previous period. The net cash at the end of FY23 stood at $127.5 million, a significant increase from $66.2 million in the previous year.

Group profit: The underlying net profits after tax (NPAT) for FY23 was $524.6 million, down by 3.7 per cent. However, this was 3.8 per cent ahead of the market consensus. A more significant slowing, however commenced in the second half (see Trading Update below).

Dividend: The final dividend announced was 115 cents per share (cps), marking a decrease from the previous comparable period. The total FY23 dividends represented a payout ratio of 65 per cent.

July 2023 trading update:

A notable trend in July 2023 was the increased variability in category performance across segments. While July’23 sales by division remain strong and well above pre-COVID levels, they revealed a decline for the JB Hi-Fi Australia segment on a total sales (-1.8 per cent) and a like-for-like (-2.9 per cent) basis. JB Hi-Fi New Zealand, however, grew 10 per cent on both a total and like-for-like basis. July sales for The Good Guys declined 12 per cent on both a total and like-for-like basis.

The slowdown for group sales appears to be a continuation of the slowing, which began in the second half of FY23. Group sales were down 0.5 per cent in the second half of FY23. Group NPAT for the second half was down a more significant -24.3 per cent . These declines however aren’t as bad as many analysts had feared.

Key takeaways:

A slowing trend for The Good Guys: The sales growth for The Good Guys declined from 3Q23 to July 2023.

Gross margins increased for the year, but with a higher weighting in 1H23. JB Hi-Fi Australia and The Good Guys segments reported a contraction in 2H23.

While total inventory remains controlled, with inventory down eight per cent, there is a real risk the inventory mix may be difficult to optimise, given the variability between segments. The company noted that it is adapting to changing market conditions and, while this is encouraging, it is a statement that confirms a softening retail environment.

The results for FY23 were marginally above market expectations, and while the core JB Australia business continues to outclass rivals, July 2023 like-for-like sales have slowed. Meanwhile, the decelerating picture for The Good Guys reveals the anticipated (and feared) softening consumer trend is upon us.

Consequently, the company admits to significant week-to-week volatility in trading and deep levels of promotional activity in its market but levels it saw pre-COVID. In terms of margins, we note larger retailers like JBH may benefit from promotional offers by Chinese suppliers as that nation’s economy grinds lower.

Final thoughts:

JB Hi-Fi showcased a robust performance in FY23. With group sales up, despite comping COVID re-opening numbers from last year, the result shines a light on the unquestionable quality of the group's competitive position in the Australian marketplace.

The slowing consumer picture might be expected to cap the performance of the shares, which are up 15 per cent since the end of June and have bounced at the time of writing on better-than-feared numbers. The degree of any continuation however will depend on the extent to which JBH shares benefit from a ‘flight to quality’ amid a seriously weak picture for many other retailers in July, August and possibly September.

Of course, the agility of the company in adapting to weakening consumer conditions will be a determining factor in its future growth trajectory. That growth will also determine its value.

Valuation:

Assuming a long-term return on equity (ROE) of 22 per cent (the ROE for the next few years is likely to be closer to 24 per cent), a conservative discount rate of eight per cent, and a continuation of the recent payout ratio of circa 66 per cent, I estimate the value of JB Hi-Fi to be in the vicinity of 12 per cent above the current share price, noting the competing dynamics for the share price of a flight to quality and a slowing and uncertain retail outlook.