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3 reasons why I’m banking on JB Hi-Fi Limited

I have three reasons that I’m banking on JB Hi-Fi Limited (ASX: JBH), the electronics goods retailer, to do well over the second half of 2014.

Solid half-year performance

In the half-year report underlying net profit was up 10% in a challenging retail environment. Five new stores and one of the new store format JB Hi-Fi HOME stores were opened in Australia and seven stores were converted to the HOME format that offers white goods and other appliances in addition to the regular electronic and home entertainment goods it is known for.

Total revenue was up 6.8% to $1.94 billion, and basic earnings per share were 90.5 cents, up from 83 cents. Shareholders were also rewarded with a 10% higher interim dividend of 55 cents per share fully franked.

Share price movement and PE

From its most recent high of $21.60 the share price has pulled back about 16% to $18.10 and the dividend yield is 3.98%. Looking back at its historic range of PE ratios, its present PE ratio of 15.4 is in the mid-range of its regular 14-20, so the market isn’t pricing it too high.

There still may be some market concern about retailing in general going forward, but full-year guidance is projecting NPAT to be $126 million-129$ million, or 8.3%-10.8% up on the pcp. A pullback in share price may offer buying opportunities because I believe earnings increases will be more apparent from here on out as overall retailing improves.

HOME format stores expansion

The company is picking an opportune time to enter the white goods and home appliances market, taking advantage of the rising housing market. The property market can have a knock-on effect for consumer spending as more people purchase homes and want to rejuvenate existing homes with new household items.

Within FY2014, 13 existing stores will be converted over to the HOME store format, and the company sees potentially about 50 HOME stores being created over the next three years. Initial results have been promising where converted stores have achieved about 13.6% more growth in comparable sales after conversion.

This store format development will also bring more competition against retailers like Harvey Norman Holdings Limited (ASX: HVN) who offer both electronic and white good products, so the performance of the HOME stores will be important to watch for investors.

Foolish takeaway

I’m looking for positive growth in consumer spending from its current place along the regular business cycle. The property market can drive more spending and when people feel they have more disposable income that flows into more discretionary purchases.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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