Should you sell JB Hi-Fi Limited and buy Ltd?

Credit: Peter Heath

JB Hi-Fi Limited (ASX: JBH) reported strong results this week, and shares are trading near a record high of close to $30.

In the face of strong competition, JB Hi-Fi has managed to sustain its low-cost competitive advantage and has been the big winner of the last decade in the electronics retailing space. Shares are up over 500% compared to around 50% gains for Harvey Norman Holdings Limited (ASX: HVN).

However, as primarily an operator of bricks-and-mortar stores, its low-cost advantage may be harder to defend in the future as more retail sales happen online and it must compete with specialist online retailers.

JB Hi-Fi has built its internet presence but online sales still represent only 3% of total sales, despite strong growth of over 35% in the last year.

Going forward, even with a larger online component, JB Hi-Fi will still have the additional costs that come with operating its nearly 200 stores.

It is interesting to consider Best Buy vs Amazon in the US market. Starting out as an online bookstore, Amazon is on track to soon overtake Best Buy as the largest seller of electronics in the US.

Shares in Best Buy have been flat for the last decade; shares in Amazon are up nearly 3,000% in the same 10 years.

Best Buy has been called a showroom for Amazon – customers go there, check out the products, and then go home and buy from Amazon instead. Could the same thing happen to JB Hi-Fi?

There will always be a segment of the market that prefers to buy from a bricks-and-mortar store, even if it costs more. However, in my view, online sellers are likely to take big chunks out of the market in the next few years.

Could Ltd (ASX: KGN) become the Australian Amazon?

Kogan has had a disappointing start to its life on the ASX. After listing recently at $1.80, shares have traded as low as $1.48 and are currently sitting at $1.57.

Kogan remains a small operator compared to JB Hi-Fi and Harvey Norman but as a specialist online player, it is arguably the best positioned to benefit from the growth in online retail.

Sales in 2016 are expected to be around $200 million, growing to $241 million in 2017.

Kogan generates large amounts of traffic to its website with minimal cost, and its decision to take over Dick Smith’s online store and 1.5 million subscribers may prove to be a good strategic move. It has also been extending its product range to other areas such as household goods, travel, and mobile services.

Shares in Kogan still do not look especially cheap and should be considered speculative given the company is yet to generate significant profits. Although not widely covered by brokers, one analyst has a 12-month price target of $2.16.

I acquired a small parcel of shares at around $1.50 and may add to that in the future if Kogan can demonstrate significant sales growth.

It is worth noting that at some point Amazon may increase its focus on the Australian market, which could prove to be a game changer for Australian retail, and is something to consider before investing in Kogan or any other retailer.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich.

Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

Motley Fool contributor Matthew Bugden has shares in Ltd. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.