Why investors should know about JB Hi-Fi Limited’s new growth plan

Next phase in store creation will capitalise on rising housing market.

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Investing in retailing stocks has its ups and downs. When the economy is down, people are tight-fisted with their money and they keep their shopping down to a minimum like groceries and everyday household items. Those are the times when you get to see which stocks have focused management and plans to grow their way through a downturn.

The ones that survive the best with thicker margins are usually the ones that take off strongly when the economy is on the mend.

The other good thing about retail stocks is that you don’t need a degree in a science or high finance to go through a company report and decipher what is going right or wrong with a company. If something doesn’t sell, you can tell why pretty quickly. You can even do your own market research and see if you would buy from their stores, much less buy stock in them.

When a company like JB Hi-Fi Limited (ASX: JBH) has a good formula for growth, you want to stick with it. Revenue has increased annually for the past 10 years and it was only in 2012 that net underlying profit dipped down.

First half FY2014 sales saw further increases and net profit after tax was up 10%. Also, during this period it began rolling out its new store format that included home appliances and white goods along with its regular electronics goods.

It wants to see about 50 of its new HOME format stores by the end of FY2016 generating $5 million in sales each for around $250 million in projected sales.

This bigger format of store will start to overlap with other retailers in this space such as Harvey Norman Holdings Limited (ASX: HVN) or privately held The Good Guys, so there will be competition.

With consumer spending improving, people will want to buy those higher priced household items like TVs, computers and mobile devices, which will improve margins as well as revenues.

Its $19.40 share price is down from a $23 high set back in November last year. That 15.6% difference is similar to a market correction and not really that bearish. Its PE is 15.5, in the middle of its historical PE range. Its dividend yield is 3.9%.

Foolish takeaway

Apart from growing its store chain, it is expanding the product range to take advantage of the expected rise in discretionary spending that usually coincides with a rising property market and low interest rates. That move will help keep up its track record of rising profits and that is why I like the company.

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

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