JB Hi-Fi Limited shares crash lower on profit guidance downgrade

One of the worst performers in morning trade has been the JB Hi-Fi Limited (ASX: JBH) share price.

In early trade the retailer’s shares are down 9% to $23.23.

Why are its shares crashing lower today?

This morning JB Hi-Fi will be presenting at the Macquarie Group Ltd (ASX: MQG) Australia conference.

Ahead of the event the company has released its presentation which includes a trading update. And as you might have guessed from the share price decline, the trading update wasn’t overly positive.

According to the release, third-quarter sales growth for its JB Hi-Fi stores has slowed since the end of the second-half.

That segment saw sales increase 6.8% on the prior corresponding period in the third-quarter, with comparable store sales growth coming in at 4%.

This means that year-to-date sales growth for the JB Hi-Fi brand has slowed to 9% and comparable store sales growth has slowed to 6.3%.

While that is far from terrible in the current retail environment, things weren’t quite so rosy for its Good Guys business.

The Good Guys business saw third-quarter sales decline 1.3% and comparable store sales decline 2.9% compared to the prior corresponding period.

As a result, year-to-date the Good Guys business has seen its total sales growth slow to 1.2% and comparable store sales growth is down to just 0.3%.

Management has placed the blame on weakness in the home appliance market. This has been caused by unfavourable weather conditions and heightened price competition.

In order for the Good Guys business to maintain its market share the company has had to reduce prices at the expense of gross margin.

Which has unfortunately led to a full-year net profit after tax guidance downgrade to $230 million. Previous guidance was for net profit after tax of $235 million to $240 million in FY 2018.

Should you invest?

With the arrival of Amazon in Australia and the emergence of Ltd (ASX: KGN), I think that JB Hi-Fi and rival Harvey Norman Holdings Limited (ASX: HVN) could continue to experience margin pressures for some time to come.

Because of this, I think investors should stay well clear of JB Hi-Fi and Harvey Norman right now and consider other options in the retail industry.

These top growth shares, for example, would be heaps better than JB Hi-Fi in my opinion.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia has recommended Amazon and 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.

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