JB Hi-Fi flags profit fall after aggressive discounting

BUSINESSDESK: Electronic goods retailer JB Hi-Fi expects to meet its $A3.1 billion annual sales target but its profit margins are under severe pressure after aggressive discounting.

It expects net profit for the 12 months ending June 30 will be between $A100m and $A105m.

For the previous year, JB Hi-Fi reported an $A109.7m net profit, which included a one-off restructuring charge of $A24.7m.

It said its gross margin for the March quarter was down 200 basis points compared to a 30 point drop in the six months ended December 31.

While it didn't separately comment on its New Zealand operations, their sales and profit performance were a highlight of its otherwise lacklustre first-half results.

“This consolidation, while impacting on gross margin in the short-term, is yet to be reflected in the company's sales to a positive degree, but presents the company with a good opportunity to continue to grow its market share in the medium to longer term,” chief executive Terry Smart said.

Dick Smith Electronics, with about $A1.5 billion in annual sales, plans to close up to 100 stores before February 2014.

And Queensland-based WOW Sight and Sound, which operated 15 stores and reported $A250m in sales last year, went into receivership in February and has since ceased operating.

JB Hi-Fi said it is negotiating on leases for two former WOW sites.

“Other players have significantly reduced or put on hold their expansion plans,” Mr Smart said.

Total sales in the March quarter, including its Clive Anthonys-branded stores, rose 7.5%, taking sales growth for the nine months ended March to 6%.

Excluding the Clive Anthonys stores, sales growth in the quarter was 8.8% and 7.3% in the nine months.

However, same-store sales growth, stores open 12 months or more, for the JB Hi-Fi-branded stores was just 1.3% in the March quarter, although it improved from January's 5.5% decline during the other two months.

Nevertheless, the company expects the current level of discounting will continue into the June quarter.

“While the impact on our earnings is clear, as a market leader with an everyday low price proposition, JB Hi-Fi will react aggressively to maintain our market leadership,” Mr Smart said.

The company doesn't believe the margin pressure is a long-term structural change.

It said its profit forecast assumes June quarter same-store sales will be flat to falling 2.5% and that margin pressure will be in line with the March quarter.

“JB Hi-Fi believes that the high level of discounting is the result of increased tactical activity as its competitor’s fight for market share, seek to clear excess and aged inventories and close stores and is not sustainable,” it said.

Shares closed yesterday at $A10.71, up from their low at $A10.01 earlier this month but sharply lower than $A19.59 this time last year.