Investors expect JB Hi-Fi Limited (ASX: JBH) to deliver strong results this reporting season. In fact, in the company's most recent guidance on 11 June, it estimated FY20 revenue of $7.86 billion. This is an 8.4% increase on the initial FY20 revenue forecast. Clearly this is an an outstanding result if accurate.
The company attributes much of the increase to the work-from-home period necessitated by coronavirus lockdowns during which consumers flocked to create home offices and purchase home furnishings. Moreover, in the company's Q3 update, it also mentioned increased volumes through online sales and the introduction of contactless delivery. However, no quantified figures have yet been provided.
While it may be a bit much to say there are dark clouds on the horizon, there are definitely a few metrics worth watching to see if the company's performance is sustainable.
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Issues impacting reporting season
Notably, JB Hi-Fi's New Zealand stores reported a 19.3% reduction in sales for 2H20. The company was at pains to point out the small revenue contribution of the NZ operations, and rightly so. However, the NZ lockdown for JB Hi-Fi was from 28 April until 14 May. A period of about 2 – 3 weeks impacting 14 stores. The Victorian closure is for 46 JB HI-FI stores and 21 The Good Guys stores for a full 6 weeks, at least.
Any guidance the company provides on 17 August, its nominated reporting date, will need to balance this against other factors likely to impact sales and net profits.
Online sales
The absolute impact of the 6 week lockdown in Victoria may be tempered by a large-scale increase in online sales. FY19 saw growth of Australian online sales by 23% to reach 5.5% of total sales. We know that the move to online shopping has been accelerated by the coronavirus pandemic. In fact, Australia Post data shows that eCommerce growth rose by 80% in the 8 weeks following the World Health Organization's (WHO) initial announcement regarding the pandemic. Australia Post believes that this year, online sales will reach 15% of all retail sales. That is 3–5 years ahead of previous forecasts.
JB Hi-Fi doesn't provide a revenue breakdown per state within Australia. Nevertheless, it is safe to assume the 6 week lockdown will have a large impact. A figure currently floating around quotes Victoria as contributing just under 25% of Australia's GDP. Using that broad brush, if JB Hi-Fi is to counteract the impact of the Victorian closures, then online sales will have to at least double.
JB Hi-Fi does not report on active users or engagement statistics like pure online companies such as Kogan.com Ltd (ASX: KGN). So we are left only with the growth in online sales. In addition, look for any phrasing that may imply repeatability. If the online sales boost is purely due to the work-from-home phenomenon, then that will have a shelf life. There are only so many desks and filing cabinets a person needs.
Financial statistics
While JB Hi-Fi's total net profit will rise with revenues, the net profit margin declared in reporting season will say a lot about future sustainability.
I am expecting the company to see an increase in its cost of doing business, or CODB. In FY19, this increased by 0.03% due to the sale of lower margin products. For example, when the company sells a lot of software, the cost of doing business is less due to the high margins. I am expecting most products sold to have relatively lower margins this FY. These include white goods from The Good Guys and laptops and accessories from JB Hi-Fi.
Lastly, I will be looking to see if there will be a lingering impact from a lower depreciation percentage on the net profits after tax (NPAT). The company saw a 23.5% reduction in depreciation after a significant pre-acquisition IT investment became fully amortised.
Foolish takeaway
The factors above may show a squeezing effect on FY21 earnings during this reporting season for JB. First, forced closure of 22.9% of Australian stores across both brands for 6 weeks. Moreover, this doesn't include stores already closed in low traffic areas like airports. Second, a likely increase in CODB due to higher percentage of lower margin sales, and increased cleaning. Third, the potential impact of ongoing reductions in depreciation.
The ability for JB Hi-Fi to lessen this blow will predominantly come from the the growth of Australian online sales. In addition, investors should look for any indications as to the repeatability of that performance, or whether this was a one-off event. This information, as well as the above metrics, is likely to weigh on the JB Hi-Fi share price in the months following reporting season.
Lastly, the company saw a growth in its dividend per share by 7% in FY19. I will be very interested to see what happens with the dividend this year given the uncertainty in the national economy.
