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JB Hi-Fi: Music to investors’ ears

Consumer electronics group JB Hi-Fi Limited (ASX: JBH) has reported its first annual fall in earnings since listing 9 years ago, with net profit down 4.6% to $104.6m, despite revenues rising 5.7% to $3.1 billion.

Earnings per share were up 4.1%, thanks to the company’s buy back of shares, to 105.9 cents, while the annual dividend has fallen 13% to 65 cents.

Margins have been hit, thanks to a triple whammy of a higher wages bill, which has risen by more than 10% cumulatively over the last three years , falling software sales (music, movies and games) and aggressive discounting. Harvey Norman Holdings Limited (ASX: HVN) recently announced a 7% fall year-on-year, in Australian same store sales, due to the tough trading conditions, and soft sales of technology products.

Despite the wage increases, JB Hi-Fi’s Cost of Doing Business (CODB) is lower than many of its local and international competitors, at 15% compared to Amazon at 21%, 29% for David Jones Limited (ASX: DJS) and 32% for Myer Holdings Limited (ASX: MYR) according to Morgan Stanley Research.

Software sales continue to move away from physical media such as DVDs and CDs to online downloads, falling 9.3% compared to the previous year, which is consistent with the previous year’s rate of decline.

Woolworths Limited’s (ASX: WOW) restructure of its Dick Smith Electronics business and the demise of several other competitors, such as WoW Light and Sound and Retravision Southern Region has led to the closure of many consumer electronics stores and the sell-off of their stock, much at below cost prices. That has put pressure on JB Hi-Fi to match those discounts, or at least reduce its prices significantly to remain competitive.

Outlook

The company has forecast sales for the 2013 financial year to be up around 5.5% compared to this year, driven by the rollout of 16 new stores, with 3 smaller stores expected to be closed. This compares to 15 new stores opened in 2012, with 4 closed, including 3 Clive Anthonys branded stores. Clive Anthonys continues to be a problem for the company with same store sales falling 24.6% compared to the previous year.

The Foolish bottom line

JB Hi-Fi have met analyst expectations with this result, and investors appear to like the result with the share price up more than 5.7% at the close.

With software sales continuing to fall, the company is looking to increase its sales of hardware such as computers and tablets, and increase store exposure to hardware at the expense of software. Structural changes are nothing new to the company – it started off selling high-end stereo systems, before moving into car audio and then software and other consumer electronics.

With a low CODB compared to many of its competitors, the company appears well placed to ward off new competitors, and to benefit from growing its market share through the demise of existing competitors, and any uptick in consumer sentiment. Online sales grew 77%, but still remain a low percentage of sales, suggesting the company has opportunities to substantially grow its online business. As a current shareholder, I’m still happy holding onto my investment in JB Hi-Fi.

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi and Woolworths. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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