Why the JB Hi-Fi Limited share price was crushed on Wednesday

Credit: Peter Heath

The JB Hi-Fi Limited (ASX: JBH) share price took a beating on Wednesday. The shares ended the day 5% lower at $18, down from $18.95, compared to a mere 0.1% drop for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and an 18.6% lift for rival Dick Smith Holdings Ltd (ASX: DSH).

Source: Google Finance

Source: Google Finance

Although there was no company-specific news that would explain the sudden fall, yesterday’s heavy decline can likely be attributed to rumours regarding Dick Smith.

Indeed, Dick Smith booked a $60 million writedown on inventories earlier this week. As a result, the retailer is rumoured to be preparing a massive 70% off everything-in-store sale over the weekend in order to clear its stock in the lead-up to the all-important Christmas period.

While that is great news for consumers wanting to pick up some bargain Christmas presents, it could also force other retailers, including JB Hi-Fi and Harvey Norman Holdings Limited (ASX: HVN) to discount their items as well, potentially destroying margins.

A similar thing happened in 2012, and it was certainly reflected in JB Hi-Fi’s results for that year where earnings before interest and tax (EBIT) and net profit after tax (NPAT) both declined.

Should you buy?

The Christmas period is the most important time of the year for most retailers and can have a dramatic impact on the overall financial results for that company. Indeed, if Dick Smith does sell its items at heavily discounted prices in the coming weeks, JB Hi-Fi’s results could be impacted in the near-term which could justify a pullback in its share price.

However, long-term investors could look to take advantage of any declines. JB Hi-Fi is a high-quality and low-cost retailer which I believe could make a great addition to investors’ portfolios at the right price.

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Motley Fool contributor Ryan Newman 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. You can follow Ryan on Twitter @ASXvalueinvest.

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