JB Hi-Fi’s (ASX: JBH) group sales were up 7% in the first half of fiscal 2026. Operating income increased 8% with EBIT margins improving in the group’s major Australian chains, JB Hi-Fi and The Good Guys. The fully franked dividend increased by 24% year on year on a higher payout ratio. Shares rallied 7%.

Why it matters: Following a spell of rising real household incomes, Australian consumers have been splashing out on home appliances and consumer electronics. However, an uptick in inflation is threatening to curb real income growth, and higher cash rates could weigh on consumer sentiment.

  • We expect JB Hi-Fi’s sales growth to moderate. A letup in cost-of-living pressure sparked a strong sales rebound. However, we believe the recent cash rate hike and elevated inflation will restrain consumer spending. The first warning signs are emerging. Group sales growth slowed to 4% in January.
  • First-half earnings are tracking slightly ahead of our prior estimates, and we lift our fiscal 2026 EPS estimate by 4% to $4.49. But the slight margin improvement is likely to be short-lived. We expect margins to tighten with slowing sales growth and more discounting to attract wary customers.

The bottom line: Our medium-term earnings forecasts are largely unchanged. Sales growth averaging 4% to fiscal 2030 and softening EBIT margins underpin our five-year EPS compound annual growth rate of 2%. We maintain our $57 fair value estimate for no-moat JB Hi-Fi. Shares are significantly overvalued.

  • We believe the market expects significant margin expansion. However, we expect margins to be constrained by competition from omnichannel retailers, like Harvey Norman, and online pure plays, like Amazon.
  • Competition for commoditized products like mobile phones and refrigerators is intense. And the rise of e-commerce introduced a new breed of competitors. Vast physical store networks are becoming less important. JB Hi-Fi’s online sales grew 13%, with its online penetration now close to 20%.

JB Hi-Fi’s national store networks becoming less important

JB Hi-Fi is one of Australia’s largest retailers, having built a strong brand and market leadership in the consumer electronics industry after the demise of smaller players and, more recently, major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.

Competitive advantage comes from JB Hi-Fi’s low-cost business model, similar to listed US peer Best Buy. Price deflation and intense competition are longer-term risks. Stores typically break even in just less than a year, with mature stores on average contributing over AUD 20 million in sales. The business doesn’t run warehouses and holds all stock at the store level, minimizing storage and transport costs; The Good Guys’ big and bulky goods distribution centers are transitioned into group home delivery centers. The business model requires high turnover and foot traffic to compensate for low operating margins on consumer electronics, home appliances, and software. Despite this, we still don’t think the business carries an economic moat.

Consumer electronics are commoditized products, and technology keeps converging. JB Hi-Fi needs to offer appealing incentives to attract mobile phone customers, given the highly fragmented market. Consumer electronics margins will also be affected by price deflation resulting from intense competition. Management openly advertises that its employees are incentivized and can often sell at cost to close a deal, sacrificing gross margin.

Bulls say

  • Consumers are more likely to turn to trusted, value-oriented brands during periods of uncertainty, providing JB Hi-Fi with a degree of insulation from economic downturns.
  • JB Hi-Fi has developed a national network, strong brand, and customer loyalty.
  • The business has cemented itself as a category killer, similar to Bunnings in hardware.

Bears say

  • Comparable sales growth weakens as consumers tighten their wallets during economic slowdowns.
  • JB Hi-Fi does not have a moat and sells commoditized products.
  • Online competition increased significantly with the arrival of Amazon. We expect the online channel will grow faster than brick-and-mortar electronics retailing, meaning pure-play businesses like Kogan are likely to take market share.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.