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2 retail stocks display contrasting fortunes in threatened sector

Glenn Freeman  |  16 Sep 2016Text size  Decrease  Increase  |  

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These two very different companies, JB Hi-Fi and Myer, have each fared quite differently as their retail sector continues to grapple with digital disruption.


The recent acquisition of Good Guys by JB Hi-Fi (ASX: JBH) has shaken up Australia's highly competitive retail sector, particularly the household goods segment.

Having weighed the decision since May, JB Hi-Fi announced the $894 million acquisition of one of its biggest competitors on 13 September.

The deal elevates the retailer into a leading position in the sale of household goods. From its current portfolio of 194 stores, its footprint will expand to 295 stores across Australia and New Zealand.

"We believe this acquisition to be beneficial for JB Hi-Fi for a number of reasons.

"The acquisition transforms JB Hi-Fi to the largest Australian retailer of home appliances and consumer electronics, ahead of closest peer, Harvey Norman (ASX: HVN)…[giving it] an edge over Harvey Norman in terms of pricing power and efficiencies of scale, which we anticipate to lead to long-term incremental market share growth," says Johannes Faul, equity analyst, Morningstar.

The move marks a shift in strategy for JB Hi-Fi, which has so far focused on the sale of software and consumer electronics. It will now significantly expand its penetration into the attractive home appliances market, which has been experiencing significant growth, fuelled by a combination of low interest rates and low unemployment.

The acquisition will see JB Hi-Fi's market share in this space jump from 3 per cent to 29 per cent--outpacing the previous category leader, Harvey Norman.

According to Faul, the deal also brings further opportunities for growth of the combined business, including new store roll-outs and further market share gains.

"We believe JB Hi-Fi has much improved its investment appeal at a fair value, based on current market prices. However, the shares are currently priced to perfection," he says.

Myer FY 2016 results disappoint

In the department store category, Myer (ASX: MYR) has not fared so well. Having come under pressure from cheaper domestic and international online business models, this year marked the first of its five-year turnaround effort, which targets average annual sales growth of 3 per cent.

With total sales of $3.29 million for fiscal 2016, total sales were up just 1.6 per cent, after adjustments.

"Myer is yet to deliver on its four quantitative target metrics, which it set at the beginning of fiscal 2016. However, management remains confident about meeting the targets," Faul says.

In addition to its sales growth target, Myer aims to improve sales per square metre by 20 per cent, generate earnings before interest, taxes, depreciation and amortisation (EBITDA) growth ahead of sales from fiscal 2017, and return at least 15 per cent on funds employed.

It failed to hit any of these. During fiscal 2016, sales per square metre increased just 5.6 percent; return on funds increased 9 per cent and EBITDA declined 7.6 per cent.

"We believe it is pivotal to investor sentiment that Myer moves towards meeting its targets in fiscal 2017. Sales and EBITDA margin growth are the likely key near-term metrics, in our view. We estimate total sales growth of 2.4 per cent and EBITDA growth of 10 per cent in fiscal 2017," Faul says.

He highlights the growing competitive threats from online retailers and larger integrated supermarket / department store operators.

"Myer was late to launch its online offering and, at this stage, sales remain immaterial as competition from first movers continues to capture consumer attention," Faul says.

He groups Myer, David Jones, Wesfarmers and Woolworths together as the four largest department-store operators, with the first two competing at the higher-end of the market.

"Although they do compete to an extent against the discount department stores operated by Wesfarmers and Woolworths, in tough economic times, these operators benefit from more frugal customer behaviour.

"In addition, the sheer scale and buying power of Wesfarmers and Woolworths lead to a strong competitive advantage over Myer and David Jones," Faul says.

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Glenn Freeman is Morningstar's senior editor.

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