The share price of JB Hi-Fi Limited (ASX: JBH) is likely to catch a break after coming under pressure over the past two weeks on fears that its FY17 profit results would contain a few nasty surprises given the weak retail environment and the competitive threat posed by the arrival of Amazon.com.
But those fears appear misplaced as management revealed a record revenue and earnings result and said that the good times are expected to roll into FY18.
This should be enough to get the electronics and homeware retailer's share price powering up again after the stock slipped 3.5% since August 3 and 9.5% since the start of the year. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is at breakeven on a year-to-date basis.
JB Hi-Fi reported a 42.3% rise in total sales to $5.6 billion, as underlying net profit rose 36.5% to $207.7 million and underlying earnings per share improved 22.4% to $1.86.
While the headline figures indicate that margins are under some pressure, the cost of doing business (CODB) actually fell 15%. Margins will be something that investors will need to keep a close eye on going forward although there should be enough good news to keep shareholders onside for now.
Another point of weakness is its New Zealand division, which is sliding backwards, although I think that won't be enough to put investors off at the moment.
The acquisition of The Good Guys business in November 2016 is partly credited for the strong FY17 performance with management saying that synergies are expected to come in at the upper end of its target of $15 million to $20 million.
More significantly, the targeted synergies are expected to be fully realised in FY19 – one year earlier than originally expected. This should give JB Hi-Fi scope to lift its profit margin which I was just talking about.
Dividend-seeking shareholders will also be happy as the company increased its payout by 18% to $1.18 per share fully franked and I am expecting a further increase in its distribution for next year given the outlook.
JB Hi-Fi said group sales were expected to hit around $6.8 billion, or 21.4% above the last financial year, and it aims to open another five JB Hi-Fi stores.
This won't be good news for short-sellers as the stock is relatively heavily shorted with 12.7% of its total shares being shorted, according to the latest ASIC data which is always a week old. Short sellers are traders who borrow stock to sell on market in the hope of buying it back at a lower price later. If the strong profit result prompts them to close out their positions, which I am expecting, then this will give the stock another reason to rally over the short-term.
If you are looking for other buying opportunities, click below to get your free report from the experts at the Motley Fool.
