JB Hi-Fi, First chosen to face the inflationary storm

He says JB Hi-Fi is navigating well in the volatile business environment, benefiting from strong demand, while moving online without sacrificing profitability.

Mr Raymond said working from home is here to stay and consumers are likely to upgrade home offices with desks, chairs and monitors – a win for JB Hi-Fi through 2025.

“I think most people still invest to some degree in their home office. JB is well positioned to continue to benefit from this replacement cycle,” he said. AF weekend.

In January – despite disruption to supply chains and operations following the omicron wave of COVID-19 – JB Hi-Fi Australia sales increased 4.3% while same store sales increased by 3.6%.

At appliance and electronics retailer The Good Guys, sales rose 2.5%, or 1.9% like-for-like in January.

Mr. Raymond noted that under JB Hi-Fi ownership, The Good Guys business demonstrated better merchandising, category expansion, “premiumization”, more desirable inventory and better supplier discounts.

“The company’s EBIT margin in the three years before COVID was around 3-4%,” Raymond said. “We expect the same margin to be around 6% over the next three years, on a normalized post-COVID basis. It’s not due to the housing cycle, it’s due to the improvement in the quality of this business.

Over the past two years, the growth of e-commerce in the retail sector has exploded, creating opportunities but also headaches due to declining margins online.

JP Morgan analyst Bryan Raymond’s top retail picks are JB Hi-Fi and Premier Investments.

According to Raymond, JB Hi-Fi’s ability to pivot online is remarkable, given that online profitability varies by retail, ranging from negative for groceries to extremely lucrative for clothing and accessories. shoes.

Grocery has a high pick-up cost per basket of approximately 7% on a $170 basket of food purchases, since items must be manually picked in-store. That’s about triple the cost of selecting the electronics category on a $400 cart.

Fashion retailer Premier Investments, which will report its half-year results on March 25, is another company with a very profitable online business.

“The economics of Premier’s online business are superior to most other businesses in Australia, thanks to the structure of the P&L, which has a relatively high gross margin between 60 and 65% and a relatively low-cost centralized distribution model,” Raymond said.

The retailer does not pay retail rents on its fulfillment center for its online sales, and its brands cannot be purchased anywhere else.

Premier’s EBIT margins have doubled since 2015 as online penetration has increased significantly, reflecting increased online sales margins.

“It’s very easy to ship a dress or a backpack or a pair of pajamas compared to a shopping cart full of groceries,” Raymond said.

Peter Alexander has been a real beneficiary over the past two years with people stocking up on loungewear and pajamas at home. There’s also little pricing pressure as there are few competitors for brands like Smiggle and Peter Alexander, and Premier has been able to increase its gross margin in recent years thanks to fewer discounts.

Premier was also able to control in-store costs by securing rental deals when in-store sales dropped, and it also reduced in-store labor costs as sales moved online.

Mr Raymond said the key to maintaining Premier’s profitability was to keep rents reduced. There is a risk given that sales will increase as the closings ease, and so will rents, he said.

But Mr Raymond said Premier was well placed to navigate the tough retail environment, leveraging its strong online platform and negotiating position with landlords to support profit growth.

He expects Premier’s EBIT margins to increase to 21.2% in fiscal 2023, due to lower rental costs as a percentage of sales.

“There is no one more difficult for landlords to manage than Premier given their scale and the large number of stores on hold,” Mr Raymond said. “They’re ready to go and they’re closing stores.”

Premier trades on a price-to-earnings ratio of 18.2 times 2022 earnings, against JB Hi-Fi at 12.9 times and Super Retail at 11.1 times.

Although Premier’s valuation is more expensive than other retailers, knocking out its major stake in Breville and Myer, it doesn’t look as stretched, Raymond said.

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