Despite JB Hi-Fi’s strong sales last fiscal year, shares currently remain overvalued according to Morningstar equity analyst Johannes Faul. He expects sales to fall over the next year as Australians reduce consumption and costs begin mounting.

Total sales grew 3.5% to $9.23 billion in the last 12 months due to strong sales momentum throughout the year. The company reported that total sales in the second half of fiscal 2022 grew 9.9% as consumer returned to instore shopping with covid-19 restrictions eased.

Online sales also continued to grow, jumping 52.8% to $1.63 billion, which represents 17.6% of total sales in the year.

EBIT (Earnings Before Interest and Tax) rose 6.9% over the period which the company attributed to elevated sales growth and an improvement in gross margins.

However, Faul does not see the strong sales growth continuing.

“Sales momentum is still solid, but we expect Australian consumers to materially cut back their spending on consumer electronics and home appliances,” he says.

Faul expects group sales to decline by 2% in fiscal 2023 despite the higher prices JB Hi-Fi will charges consumers.

After a year of strong growth, Faul is concerned about the impacts rising inflation will have on the white good retailer.

With Australian CPI coming in at 6.1% in June and the cash rate at 1.85% as of this month, consumer behaviour is beginning to change as cost-of-living pressures intensify.

Faul compares JB Hi-Fi to leading US consumer electronics retailer Best Buy who told investors last month that “as high inflation has continued and consumer sentiment has deteriorated, consumer demand within the consumer electronics industry has softened.”

A media release from the Australian Bureau of Statistics (ABS) highlighted sales volumes for household goods retailing was down 1.8% in June, the industry’s third consecutive quarterly fall in volume.

Ben Dorber, head of retail statistics at the ABS said, “cost of living pressures and increasing interest rates appear to be weighing more on sales volumes for household goods retailing, the industry where most high-priced discretionary items are sold.”

Faul sees inflation impacting profits at JB Hi-Fi in more ways than consumer spending habits.

He also forecasts shrinkage in operating margins over the next year when weaker sales numbers meet rising costs.

“Coinciding with softening sales growth, we expect cost inflation to catch up with recent sales growth and we forecast operating profit margins to weaken in fiscal 2023.”

He forecasts wage expenses to increase by 3% in fiscal 2023. Faul sees the rising cost of running the business as a concern because wages are JB Hi-Fi’s largest operating cost, accounting for about two thirds of its business costs.