In the past few years, both retailers have been forced to cut their margins on electronic goods simply to compete against online stores. JB Hi-Fi also still sells music CDs and physical DVDs when music and movies can be obtained digitally through the likes of Apple’s iTunes and Amazon. With prices for DVDs and CDs falling, I imagine that JB Hi-Fi makes very little profit on each item.
As a result, the company is allocating less and less space in its stores for CDs and DVDs, instead looking for higher margin products like hardware.
After the digital TV revolution, TV prices have seen significant deflation, and most people now own at least one LCD or plasma flat screen TV, so sales will slow. TV sales will now return to the normal replacement cycle, adding further pressure on JB Hi-Fi.
However, JB Hi-Fi has several things going for it. It has very low costs of doing business, and therefore can maintain lower margins than most of its competitors. The evolution of consumer electronics continues, with smart TVs, new smart phones, tablets, e-readers, laptops, notebooks, sports cams, wi-fi enabled cameras and new Sony and Microsoft gaming consoles along with a plethora of new games.
JB Hi-Fi also has many if its stores inside shopping malls, so benefits from passing foot traffic and impulse buys. The company continues to roll out new stores, and is a number of years away from reaching its ultimate target. JB Hi-Fi has also expanded into new areas, including an investment in a company that provides IT products and services to 400 schools in Victoria as well as corporate clients. The company sees this as a $500 million opportunity.
And just last year, JB Hi-Fi expanded into white goods and consumer appliances, stepping into territory normally commanded by Harvey Norman and discount retailers like Big-W and K-Mart. Add in a move into musical instruments, DJ gear, streaming music, e-books and a soon-to-be-released streaming video service and JB Hi-Fi has plenty of levers to deliver growth. Its online store has plenty of room to grow, representing just 2% of total sales.
The falling Australian dollar should also help the company, with offshore online purchases now at least 10% more expensive. Of course, JB Hi-Fi will also face higher costs on its imports, but the playing ground has levelled out somewhat.
At its most recent results, the company indicated that it was experiencing positive growth in same store sales, after a lack lustre period of negative growth. Currently trading on a P/E ratio of around 14, and paying a fully franked dividend yield of over 4%, JB Hi-Fi could be one for the watchlist.
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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi.
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