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.
