Here’s why JB Hi-Fi Limited shares fell another 4.6%

The company may not be immune to a further deterioration in consumer spending.

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On Friday the benchmark S&P/ASX 200 (INDEX ASX: XJO) index fell 0.9%, and JB Hi-Fi Limited (ASX: JBH) shares slumped 4.6 %. This makes a total fall in just over one month since the Federal budget of 9.8%.

So What:

On Thursday JB Hi-Fi failed to meet expectations for FY2014 total sales. They were forecast to increase by around 5.3% versus prior guidance of 6%-8%. However, prior guidance for net profit after tax (NPAT) was only achieved by lifting gross margins and reducing costs.

In a prior article I warned that the company may not be immune to a further deterioration in consumer spending. This has already afflicted fellow discretionary retailers including the Reject Shop Ltd (ASX: TRS), Pacific Brands Limited (ASX: PBG) and Flight Centre Travel Group Ltd (ASX: FLT).

Other downside risks for JB Hi-Fi may be increased competition on price or product range. Also, online competition may contribute to ongoing deflationary pressures (more discounting). This would be exacerbated by a rising Aussie dollar.

Other potential casualties in the retail space are Harvey Norman Holdings Limited (ASX: HVN) and Myer Holdings Ltd (ASX: MYR). Also at risk are major landlords, such as the domestic retail-focused Westfield Retail Trust (ASX: WRT) and FED CNTRES STAPLED (ASX: FDC), that specialises in the ownership and management of Australian shopping centres.

Now What:

While JB Hi-Fi is the outstanding company in the discretionary retail sector, the question really should be whether investing in a sector with such headwinds is wise. Retail stocks such as Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) may be more appropriate medium-to-long term investments as they sell essential food items.

Why not invest in an expanding sector and pocket a formidable fully franked dividend yield?

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This stock has been nominated as their No 1 pick for 2014 and could be on the cusp of substantial growth.  It also offers a fully franked yield of 4.1% (or a grossed up 5.9%). 

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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