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Woolworths Limited vs JB Hi-Fi Limited: which retailer should you buy?

With the outlook for the Aussie consumer sector being so downbeat, it is little wonder that many domestically-focused retailers have seen their share prices fall. And, with interest rate cuts yet to have their full impact as a result of time lags, their near-term performance could be somewhat disappointing.

Take, for example, Woolworths Limited (ASX: WOW). Its shares have declined by 16% since the turn of the year, while its net profit is forecast to fall at an annualised rate of 7.5% during the next two years.

Part of the reason for this is a switch from shoppers away from Woolworths and towards no-frills, discount supermarkets such as Aldi and Costco. They promise savings versus the major operators and, with them having efficient business models and low cost operations, they can afford to be competitive on price. With Aussie shoppers seeing their disposable incomes squeezed, no-frills supermarkets have benefitted from a greater price consciousness among consumers to the detriment of more established (and often higher priced) players such as Woolworths.

This situation, though, has not carried over to electronics and home appliances retailer JB Hi-Fi Limited (ASX: JBH). Its shares have already risen by 23% since the turn of the year and, with the company’s bottom line expected to increase by 5.2% per annum during the next two years, investor sentiment may remain rather upbeat.

That’s especially the case since JB Hi-Fi continues to trade at a discount to the wider index, with it having a price to earnings (P/E) ratio of 13.9 versus 15.2 for the ASX. However, with Woolworths shares falling in recent months, it now has a P/E ratio of just 13.6. The two companies are also similarly priced in terms of their price to sales (P/S) ratios, with Woolworths having a P/S ratio of 0.54 versus 0.53 for JB Hi-Fi.

However, where JB Hi-Fi appears to have an advantage over Woolworths is with regard to its future prospects. JB Hi-Fi is intent on increasing the size of its estate, with it expecting to open six new stores in the current financial year and being on-track to hit its target of 214 stores – up from the current 187 stores.

A key area of growth for JB Hi-Fi is its Home division, while it is also introducing small appliances into existing JB Hi-Fi stores. This, alongside store refurbishments and layout reconfiguration, should add value for customers and allow JB Hi-Fi to tap into the $4.6bn Australian home appliances market in a much larger way.

Meanwhile, Woolworths is expected to refresh its strategy under new leadership, but thus far its focus on investing in pricing ($200m in the second half of the last financial year) and the challenges it is facing in turning around the Master’s home improvement business have not inspired confidence in its long-term potential.

And, while changes to its business model have helped it to become more efficient and its aim to make $500m in cost savings is likely to help its bottom line, Woolworths still appears to lack clear growth opportunity over the medium term compared to JB Hi-Fi.

Certainly, Woolworths could become an excellent turnaround stock and its shares could move upwards in the near term as the market responds to a new strategy from its new CEO. However, with JB Hi-Fi trading on a similar valuation and having a sound, prudent and long term strategy already in place, it seems to be the better buy right now.

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Motley Fool contributor Peter Stephens has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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