Under the Spotlight AUS: JB Hi-Fi (JBH)

JB Hi-Fi ($JBH) will hope this week’s Apple ‘Glowtime’ iPhone event translates to showtime at its cash registers. 

Australia’s largest electronics and appliances retailer is banking on the new iPhone 16, as well Samsung’s S24 and Google’s Pixel 9, to lure consumers keen to get their hands on the latest AI-enabled phones. 

When John Barbuto started his first store in 1974 selling vinyl albums and sound systems, AI was the stuff of fantasy. But now it’s expected to lead a replacement cycle where laptops, TVs and appliances bought in the pandemic also get upgraded. Little wonder the stock is up 55% this year.

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AI capabilities feature strongly as a primary reason for buying a new phone, especially among Gen Z consumers. It’s estimated 16% of global smartphones will be AI capable this year, growing to 54% by 2028. 

The popularity of AI-enabled technology arrives at an opportune time for the $8.8b retailer, which also owns The Good Guys. 

With lower interest rates likely and stage three tax cuts kicking in, JB Hi-Fi is well positioned to execute on one of its priorities for FY25: driving sales of new AI devices. 

‘Definitely, AI-enabled devices are going to give us some runway,’ CEO Terry Smart told analysts on the company’s full year earnings call. 

Smart argues mobiles are becoming less of a discretionary purchase for consumers: the integration of AI, faster chips and better cameras are viewed as must-haves. He also sees room to steal mobile share from the big telcos. And since the latest chip offerings from AMD and Intel will feature in new laptops as well, an expanded model range should increase affordability of that product too for consumers.

Promote or die

Household budgets are tight but there are signs consumers are starting to spend again after a gloomy FY24. 

JB Hi-Fi sales fell 0.4% to $9.59b in FY24 and profit fell 16.4% to $438.8m. However, results exceeded analyst expectations. The better-than-expected numbers were attributed to strong promotional activity around Boxing Day, Black Friday and End of Financial Year sales. 

The solid result highlights the company’s focus on offering the biggest brands and largest range at the best value. Pressed on the use of promotions to attract customers, Smart offers no apologies. 

‘If the customer is out there shopping we’ll just do whatever it takes to get the customer to shop with us,’ he told analysts. ‘When it’s tough, you go out and promote,’ he added. 

The positive sales momentum in the second half of FY24 continued into July, with the company’s Australian sales up 5.6% year-on-year in July. The Good Guys sales were up 2.7% and JB Hi-Fi’s New Zealand sales were up 12.2% compared to a 4.9% decline at the same time last year. 

These numbers and an upbeat outlook fuelled a rally in JB Hi-Fi shares to a record high of $82.31 (as at 12 September). 

Cookin’ up growth

While cutting-edge AI tech is a big opportunity, JB Hi-Fi signalled there is plenty of growth in an old-school part of the market: kitchen, laundry and bathroom appliances.

The $47.8m acquisition of a 75% stake in e&s, one of Victoria’s oldest specialist retailers in that segment, offers an entry into its premium end. This complements the mass market reach of The Good Guys.  

While e&s’ EBITDA of $7m seems skinny compared to sales of $230m, the growth in The Good Guys’ margins since being acquired by JB Hi-Fi in 2016 hints at the potential upside.

The e&s deal was funded by cash. There was enough left over for a special dividend of 80¢ a share and a final dividend of $1.03 a share totaling $200m. Net cash is around $300m. 

Glowing hot

JB Hi-Fi hasn’t just been able to generate consistent sales growth by offering competitively priced technology. It has also grown its scale and scope by moving into new markets, where it then squeezes operational efficiencies to protect margins and drive cash flows. And now the company is primed to cash in on a rebound in consumer spending and the adoption of AI-enabled devices. 

That’s reflected in a share price that has outperformed other discretionary retail plays like Super Retail ($SUL) (+9% this year) and Nick Scali ($NCK) (+24%). Accessing that growth doesn’t come cheaply: the stock is at around 19x FY25 earnings. But that’s the price of basking in the glow of the AI revolution.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.