JB Hi-Fi’s result tells us the consumer slowdown has already begun

Roger Montgomery

Montgomery Investment Management

Consumer electronics and home appliances retailer, JB Hi-Fi (ASX: JBH), has just released its first-half results for FY23. For the six months to December 2022, there was a lot to like. But sales figures for January paint a picture of a more cash-strapped consumer and, by extension, a slowing economy.

Broadly speaking JB Hi-Fi’s result was in line with the guidance they provided in their trading update of 17 January.

Australian JB Hi-Fi stores enjoyed sales growth of 9.1% to A$3.59 billion. Same Store Sales (SSS) growth was 8.5 per cent, thanks in part to the company cycling negative growth of 2.5% in the prior corresponding period.

Much like Nick Scali’s (ASX: NCKresult, however, the company saw a meaningful slowdown in the year’s second quarter. For the first quarter, sales grew by 14.6%, but sales growth slowed to 5.6% in the second quarter.

Over at the Good Guys – the company JB Hi-Fi acquired in 2016 for $870 million – total sales were up 7.3% to $1.54 billion, with SSS growth rising by precisely the same amount, 7.3%. The Good Guys also experienced a sharp decline in the second quarter to December 31. First-quarter sales growth was 12.3% and second-quarter sales growth slowed to just 3.3%.

JB Hi-Fi’s online sales are now 14.2% of total sales, or $752 million versus 22% in the previous corresponding period, remembering the prior period took into account lockdowns.

Gross margins are improving. The company reported gross margins of 22.85% versus 21.77% in the prior period. Inflation is the scourge triggering rising interest rates and great pain for consumers and borrowers.

When a company reports improving margins, it could be due to a favourable ‘mix-shift’ in the products being sold compared to a prior period, or it could be due to the company raising prices beyond the rising cost of its inputs. JB Hi-Fi is a major Australian retailer and, as such, has an important role to play in helping to keep inflation in check.

The practice of price gauging in Australia is helping to fuel inflation, and all businesses need to consider their triple-bottom-line, and particularly their social responsibilities, especially if conditions become economically tough for many.

The gross margin at the Good Guys was 23.21% compared to 22.58 per cent in the prior corresponding period. Another favourable mix-shift?

Cash has risen from six months prior. Cash at JB Hi-Fi on December 31, 2022 was $391 million, up from $125 million at the end of June 2022. The company also used $17 million to buy shares for the employee share trust and $167 million for dividends. Another $59 million was used to pay down bank loans. That means the company generated what I call ‘take to the grocery store’ cash flows of $509 million.

The company reported underlying NPAT for the first half of $329 million, up 14.6 per cent on the prior corresponding period.

January trading update

Most of the above are backward-looking variables. As part of its release to the market, JB Hi-Fi also provided a trading update revealing conditions in January. In January 2023, JB Hi-Fi Australia’s total sales were up just 2.5% with SSS slowing again to just 1.5 per cent.

The Good Guys' total sales were flat (growth of 0.0%) and same-store sales were likewise flat.

The rapidly slowing sales growth, talk of a recession and rising interest rates did not inspire management to provide any forecast for FY23. However, the consensus view is the slowdown will become more noticeable as the year progresses.

Given the very strong results in the first half and the rapidly slowing growth, most analysts will conclude the company is now past ‘peak earnings’. The same factors that dissuaded management from providing full-year guidance will probably also dissuade investors from being too bullish about buying JB Hi-Fi.

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2 stocks mentioned

Roger Montgomery
Founder and Chairman
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger has than three decades of experience in investing, financial markets and analysis. Roger also authored the best-selling investment book, Value.able.

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