JB Hi-Fi Limited (ASX: JBH) is one of Australia's largest and most well-known retailers of consumer electronics like TVs, DVDs, video games and music players and CDs. It has a significant bricks-and-mortar presence in Australia with 192 stores nationwide, and according to its website it is now also the largest home and entertainment specialist operating in New Zealand, with a total of 15 stores located throughout the country.
JB Hi-Fi added an additional 100 stores to its portfolio when it purchased whitegoods retailer The Good Guys for a pretty hefty $870 million in the latter half of 2016. Overall, the combined JB Hi-Fi Group now offers a diversified range of products covering a broad spectrum of higher-end home appliances and electronics.
In this modern age of ecommerce and digital marketplaces, JB Hi-Fi, like fellow brick-and-mortar stalwarts Flight Centre Travel Group Ltd (ASX:FLT), is pushing its customer-service focused business model.
JB Hi-Fi is banking on the idea that, if you are an electronics novice wanting to purchase a higher-end product, you might prefer the in-person advice of an experienced staff member rather than the incomprehensible list of tech specs you'd see if you were buying the same product online.
But is this business model still viable?
On the surface things are actually looking pretty impressive for JB Hi-Fi.
First half 2018 total sales were up a massive 41% on the prior comparative period to $3.7 billion, while NPAT surged 21% higher on an underlying basis to $151.7 million.
However, before getting too excited, it's vital to note that this big increase was driven primarily by the impact of The Good Guys acquisition, which was formalised in November 2016.
JB's 1H17 result only included one month worth of sales from The Good Guys, whereas 1H18 included the full benefit of the new business combination.
This becomes particularly apparent when reviewing the segment results: 1H18 sales brought in by The Good Guys were up a whopping 318% versus 1H17, but if the period prior to the November 2016 acquisition is also taken into account Good Guys sales are up a much more modest 2.4%.
Sales for JB's core Australian business increased 10.8% versus 1H17 to $2.5 billion, which is still a solid result given the increasing threats posed to the company by growing Australian online electronics retailer Kogan.com Ltd (ASX:KGN) and international ecommerce behemoth Amazon, which launched its Australian operations in December 2017.
Interestingly, online sales were a big source of revenue growth for JB Hi-Fi, increasing 40.6% on 1H17 to $119.3 million. This is definitely something investors will want to keep an eye on in future given the new competition entering this space.
The JB Hi-Fi share price has had a topsy-turvy 2018 so far. After hitting a 12 month high of $29.47 in early February, the price plummeted over 70% in a matter of months to be a little over $22 in early May.
Since then shares have rebounded but are still short of where they started the year, currently trading at under $24. This shows the level of uncertainty investors are feeling about the evolving retail industry – so far it's been hard to judge just how much of a threat Amazon is posing to JB Hi-Fi's business and the market is having a difficult time pricing this risk.
The FY18 Group outlook is still strong, with total sales forecast to hit $6.85 billion. Group NPAT for FY18 is expected to come in at $230 million, despite sales growth for The Good Guys tracking below guidance due to stiffer than anticipated price competition.
Foolish takeaway
JB Hi-Fi is becoming an interesting modern case study for the battle between traditional brick and mortar shopfronts and the new generation of pure play online retailers. Although JB Hi-F is generating an increasing amount of its sales through online channels, it is still very much part of its business philosophy to maintain a physical presence through its wide network of stores.
And while it's still too early to tell what impact Amazon will have on its bottom line, it seems to be rewarding its more loyal investors with some solid financial results in a tough competitive environment.
