Investors have done extraordinarily well by owning JB Hi-Fi Limited (ASX: JBH) shares over the past 15 years, with shares multiplying by more than 10x during that period. Today, the shares trade at $23.64, down from the $24.94 share price they began the year at and almost 20% below the $29.47 peak they struck on 1 February.
Whether JB Hi-Fi shares can re-test those highs and continue to deliver strong returns for shareholders could well depend on the performance of The Good Guys (TGG).
In what was a major purchase for JB Hi-Fi, the company’s acquisition of TGG was announced in September 2016 with the company offering total cash consideration of $870 million. It had clear rationale for acquiring the business with the tie-up strengthening the group’s tight grasp over the home appliances and consumer electronics markets.
However, there are reasons to be concerned about TGG. In a trading update earlier this month, JB Hi-Fi said that total sales growth for The Good Guys was negative 1.3% during the third quarter (compared to 2.6% growth in the prior corresponding period), with comparable sales growth down 2.9%. That means that, on average, the stores that existed at the same time last year generated 2.9% less revenues. Year-to-date, comparable sales growth for the brand has been 0.3% compared to a 0.9% decline during the same period in FY2017.
Pleasingly, JB Hi-Fi confirmed it is on track to achieve its full-year sales guidance of $6.85 billion, with $2.1 billon of that from TGG. However, guidance for net profit after tax was reduced to $230 million, down from a guidance range of $235 million to $240 million.
While the potential benefits in combining the two businesses were clear, so were the risks. Investors ought to exercise some caution.
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Motley Fool contributor Ryan Newman has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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