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4 reasons Dick Smith Holdings Ltd is a better buy than JB Hi-Fi Limited

When a company outperforms expectations of a weak result, the share price typically spikes. This was exactly what happened with JB Hi-Fi Limited (ASX: JBH) recently. The market and analysts were expecting a further slowing of same-store sales growth and lower profits, but the company outperformed on both metrics, leading to a share price bump of over 10%.

But Dick Smith Holdings Ltd (ASX: DSH) may be even better positioned to outperform when it reports its own results for the following reasons.

Online advantage – it is no secret that the future of retailing will be what has been termed an “omni-channel” operating model. This means that traditional bricks-and-mortar retailers will have strong online operations backed by established supply chains and infrastructure.

This is in contrast to “pure” online retailers or traditional retailers that don’t have any online sales. Dick Smith already has an online run rate that comprises 7% of sales, which is forecast to grow to 10%. In comparison, JB Hi-Fi only books between 2% and 3% of sales online.

The benefits of online are higher margins due to lower labour costs and better efficiency, especially when operating a “click-and-collect” model where the customer buys online and can then pick up goods from their local store.

Room to grow – store network expansions drive the sales of any retailer, and Dick Smith has targeted a sustainable store total of 450, and it currently has a store total of around 80% of this target.

In addition, management has been proactive in closing underperforming stores, renegotiating rents and making sure the business case of each store stacks up on its own.

Private strategy – the supermarket giants and Aldi have shown the profit incentive of pursuing higher margin private label goods sales in groceries. However, the concept is arguably much easier to apply to electronics. After all, unless you are a complete audiophile, you won’t be willing to pay $150 for branded replacement headphones when a $30 pair will work just as well.

Dick Smith has pursued a private label strategy that already accounts for 12% of sales, and this is forecast to increase to 15%.

Brand expansion – many articles argue that electronics retailing is a low margin and deflationary business market. However, Dick Smith is diversifying away from this risk by adding home appliances to its existing stores.

It is doing this rapidly, with 100 stores slated to have the additional product lines within six months. It is also a low-cost way to test the market, with the costs covered in the existing capital expenditure budget.

The company also operates the Move and Powered by Dick Smith electronics departments of David Jones, which exposes the brand to a different customer segment than their core customer.

Move in particular, which is targeted at younger consumers, has considerable scope for growth in a high margin segment of the market as younger consumers seek to personalise and customise their technology at the same time as they purchase new products.

Dick Smith also pays a solid and sustainable dividend, which means it ticks many of the boxes that make for a great longer-term investment.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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