Long-time shareholders of electronics retail giant JB Hi-Fi Limited (ASX: JBH) have reaped huge benefits over the past 10 years, but there are some who doubt the party can continue for much longer.
A look in the rear-view mirror
Since the 2006 financial year (FY06), JB Hi-Fi has more than quadrupled its revenue, hitting $3.95 billion in the last financial year (FY16), while its net profit after tax result has risen 490% to $152.2 million in FY16, up from just $25.8 million in FY06.
Meanwhile, the shares have more than quadrupled in price. From $6.36, they have risen 332% to $27.45 as of Friday’s close, while the company has also returned a total of $6.35 in dividends (excluding franking credits). This amounts to another 100% gain.
Indeed, many retailers have gone backwards during that time, while many have collapsed under the weight of international competition and the rise of internet shopping. JB Hi-Fi has consistently proven its ability to adapt to the times, altering its product range in favour of the goods and services that were hot on the radar of consumers at any given time.
The Good Guys
JB Hi-Fi’s share price hit a hit a high of $31.20 in September this year, but has since retreated 12% to $27.45. Share prices of high quality businesses often trade beneath their all-time high price levels, so that in itself shouldn’t be a concern, but there are potential headwinds facing the business that investors should at least be wary of.
On 28 November 2016, JB Hi-Fi announced the completion of the acquisition of its rival The Good Guys, which it officially announced on 13 September.
The rationale for the acquisition was clear: It would create the country’s biggest home appliances and consumer electronics business with a market share of 29% and 24% in those markets, respectively. By comparison, Harvey Norman Holdings Limited (ASX: HVN) would maintain a 24% and 15% share of those segments.
On a pro forma basis, the combination of JB Hi-Fi and The Good Guys would have generated roughly $6.04 billion of sales in FY16, while the group had a combined network of 280 stores across Australia (plus another 15 in New Zealand) as of 30 June, 2016.
The problem, however, is that both JB Hi-Fi and The Good Guys maintain two very different cultures. For that reason, the pair will continue to operate from different headquarters (for now, at least), which will generate little in the way of cost synergies. There is no guarantee that the combined business will generate more value for shareholders than if JB Hi-Fi had remained on its own, which is one of the reasons why some investors may have gotten cold feet when it comes to owning JB Hi-Fi’s shares.
An Amazonian struggle
Another potentially greater issue facing JB Hi-Fi is the rumoured arrival of Amazon.com in Australia next year. Although it could take some time to find its feet in Australia, Amazon.com has the potential to disrupt Australia’s retail industry (and other industries) in a way many will not be prepared for.
While some retailers could struggle to remain profitable, others will likely be forced to reduce their margins in order to remain competitive against the internet juggernaut. That could include businesses such as JB Hi-Fi and Harvey Norman, together with Baby Bunting Group Ltd (ASX: BBN), Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES).
That isn’t to say that JB Hi-Fi isn’t prepared. I for one hope it can thrive now that it has joined forces with The Good Guys.
However, investors do seem somewhat cautious, which I think is a wise approach to take. As it stands, JB Hi-Fi’s shares are trading on a price-earnings ratio of 15.7x forecast earnings.
That isn’t overly expensive for a business that has generated such huge returns for investors over the past decade. But if JB Hi-Fi’s growth does slow considerably following the arrival of Amazon, then don’t be surprised if its share price falls below today’s level.