Investors are giving management of JB Hi-Fi Limited (ASX: JBH) the benefit of the doubt in fighting off the online threat given its strong track record and its ability to deliver positive earnings surprises, but the market may be underestimating the risks to the business, according to Credit Suisse. The broker’s analysis runs contrary to the belief of some experts that the electronics and small appliances retailer will be able to hold its own against the onslaught of online rivals like Amazon.com. After all, the well-run retailer is good at evolving to meet market trends and that is how…
Investors are giving management of JB Hi-Fi Limited (ASX: JBH) the benefit of the doubt in fighting off the online threat given its strong track record and its ability to deliver positive earnings surprises, but the market may be underestimating the risks to the business, according to Credit Suisse.
The broker’s analysis runs contrary to the belief of some experts that the electronics and small appliances retailer will be able to hold its own against the onslaught of online rivals like Amazon.com.
After all, the well-run retailer is good at evolving to meet market trends and that is how it survived the CD-to-online music revolution.
Further, the online threat is not new and JB Hi-Fi is rapidly expanding its online channel.
However, the only risks you need to worry about are the ones you can’t see and Credit Suisse thinks investors are blindsided by falling foot traffic in some shopping malls that JB Hi-Fi has stores in.
“With the market focusing mainly on retailer specific performance, we feel that shopping centre foot traffic could emerge as the hidden risk to medium-term forecasts,” said the broker.
“About 21% of Australian JB Hi-Fi stores are in centres that experienced declining foot traffic or sales revenue in 2017.”
What this means is that the retailer may have to close underperforming stores to avoid becoming the next Myer Holdings Ltd (ASX: MYR).
But even that strategy carries risks. Credit Suisse estimates that 65% of a shuttered store’s earnings before interest, tax, depreciation and amortisation (EBITDA) will need to be transferred to other stores in the network before the store closure is earnings neutral to the group. That’s a pretty high watermark.
What’s more, the next retail battle front may actually be in deliveries. Credit Suisse believes delivery will emerge as the “hidden” threat to JB Hi-Fi in 2018 and 2019 as online shoppers are increasingly expecting better delivery times and lower delivery costs (or free delivery).
JB Hi-Fi and its traditional rival Harvey Norman Holdings Limited (ASX: HVN) are moving to embrace this by offering cheaper and multi-tiered delivery options, including click and collect.
However, their businesses are not designed to maximise logistics and warehousing efficiencies as online retailers like Amazon are. Delivery could add significant margin pressure on JB Hi-Fi at a time when online rivals like Kogan.com Ltd (ASX: KGN) are improving their platforms and product offering.
Another risks that investors should be alive to is that JB Hi-Fi’s online strategy, even if successful, may not offset the decline in in-store sales.
I am thinking of Fairfax Media Limited’s (ASX: FXJ) experience. The newspaper publisher is on a much more stable footing after it (finally) got a coherent enough digital strategy to arrest its decline, but it is still a shadow of its former self.
JB Hi-Fi is a much better managed business and it is embracing the online evolution more quickly and eagerly, but even then, it may have to settle for a smaller piece of the retail pie.
Credit Suisse has an “underperform” recommendation on the stock with a price target of $21.36 a share.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Kogan.com ltd. 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 Scott Phillips.