JB Hi-Fi’s Sales Momentum Weakened During the First Half, and We Expect More Slowing in the Second

We maintain our earnings forecasts and AUD 35.50 fair value estimate for no-moat JB Hi-Fi. First-half fiscal 2023 results had been effectively prereleased on Jan. 17, 2023, including 9% sales growth to AUD 5.3 billion and 14% EBIT growth to AUD 479 million. See our note published the same day: “JB Hi-Fi’s Strengthened Profit Margins Suggest Price Discounting Hasn’t Picked Up Yet.”

JB Hi-Fi’s sales remain elevated in the first half of fiscal 2023, up 32% on the pre-COVID-19-hit first-half fiscal 2020—equivalent to a 10% CAGR. However, we continue to expect the combination of consumer price inflation and higher mortgage rates to force a slowdown in nonessential retailing in calendar 2023.

A slowdown in consumer spending was apparent in the January 2023 trading update. Total store sales growth at JB-Hi-FI Australia and the Good Guys divisions was 9% and 7% in the December half, respectively, before slowing to 3% and 0% in January 2023. We forecast this sales momentum to progressively worsen over the second half of fiscal 2023. Our fiscal 2023 revenue forecast of AUD 9.3 billion implies a 9% decline in sales growth in the second half compared with the prior comparable period, or pcp.

We also anticipate a normalisation of inventory levels across the industry to intensify competition, resulting in more price discounting and weighing on gross profit margins. We expect JB Hi-Fi gross margins to decline by 150 basis points to 21.0% in fiscal 2024 from 22.5% in fiscal 2022. Inventories are already increasing ahead of sales. Inventory turnover was down to 6.9 times, from 7.5 times in the pcp. Year-on-year inventory levels increased 14% to AUD 1.2 billion, as inventory availability improved from COVID-19-related supply chain issues in the pcp.