Should you sell your JB Hi-Fi Limited shares?

Credit: Peter Heath

The JB Hi-Fi Limited (ASX: JBH) share price has continued to slide lower on Wednesday and is down 2.5% to $22.42 in late morning trade.

This means that the retailer’s shares have now lost over 20% of their value during the last three months.

As a comparison, the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen around 4.7% during the same period.

Why are JB Hi-Fi’s shares sinking lower?

The majority of JB Hi-Fi’s decline has come following the company’s abject trading update last week.

That update revealed a slowing of sales growth from its JB Hi-Fi brand in the third-quarter of FY 2018 and a decline in sales from the Good Guys business.

As a result, management downgraded its full-year net profit after tax guidance to $230 million. Previous guidance was for net profit after tax in the range of $235 million to $240 million in FY 2018.

Management blamed the downgrade on unfavourable weather and heightened price competition impacting its Good Guys business.

However, one broker believes there is more to it than this.

According to a note out of Deutsche Bank, its analysts have downgraded JB Hi-Fi’s shares to a hold rating from buy after looking deeper into the situation.

While Deutsche acknowledges that competition has weighed on its performance, it also believes that the company is suffering from its sales mix. Its analysts suspect that a lack of suitably skilled sales staff and incentive schemes means that sales of high-margin premium products are on the decline.

As a result, Deutsche is concerned that its margins could be under pressure for some time to come.

Should you sell your JB Hi-Fi shares?

While JB Hi-Fi’s shares trade on an undemanding multiple of just 11x estimated forward earnings, I still wouldn’t be a buyer today.

Based on its recent quarterly performance I think there is a fair chance that its earnings will decline in FY 2019, especially with the housing market cooling and growing competition online from the likes of Amazon and Ltd (ASX: KGN).

This could make JB Hi-Fi and its equally cheap-looking rival Harvey Norman Holdings Limited (ASX: HVN) potential value traps.

Instead of JB Hi-Fi I would be buying these top shares that are kicking goals today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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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