Keeping up with technological change is a tricky game but JB Hi-Fi has managed it well so far. Photo: Glenn Hunt
The energetic types manning the cash registers at electronics retailer JB Hi-Fi, many with a sleeve of elegant tattoos running up their arm befitting the street-smart and slightly grungy ethos of the firm, haven't had much time to think about the big-picture trends such as the "internet of things" in the past few weeks.
They've been run off their feet, with foot traffic booming, particularly in computer sales, as the lure of the tax deduction of up to $20,000 for small businesses drives a nice spike in sales after federal Treasurer Joe Hockey urged people in his May 12 budget to go out and spend.
JB Hi-Fi is at the forefront of the fast-changing sector, where the product cycle is being compressed as new technology arrives.
Consumer electronics is a tricky industry. JB Hi-Fi is at the forefront of the fast-changing sector, where the product cycle is being compressed as new technology arrives. This is generally a good thing for the $2.1 billion retailer, provided shoppers keep coming into the stores to buy the new gizmos replacing outdated products such as MP3 players as those items get over-run in the rush for all-in-one devices such as smartphones capable of much more than a single function.
DVD players are also losing popularity along with the generation of flat-screen televisions that aren't capable of being "smart" TVs and able to handle streaming services and on-demand viewing via high-speed internet. Stan, the joint venture between Fairfax Media and Nine Entertainment Co, Netflix and Presto are pushing hard to convince the public of the virtues of streaming, and those selling the hardware to facilitate it benefit from each shift in technology and consumer behaviour. Anyone still persevering with an old Rank Arena television with a heavy wood-grain outer casing in the corner of the lounge room is out of luck.
Happy anniversary
The JB Hi-Fi share price is sitting pretty again at around $20.68 after being in the doldrums in mid-2012 when it sank to below $9. Chief executive Richard Murray is headed for his first anniversary at the helm of the company, after taking over from Terry Smart on July 1, 2014, who had run the company since mid-2010. Richard Uechtritz, chief executive for more than a decade before then, is back on the board as a director, and Mr Murray has lived and breathed the business since first joining as chief financial officer in 2003. But the share price did reach $23.62 in 2009.
The army of small business types seizing on the tax deduction of up to $20,000 has been a major driver of a solid uptick in computer equipment sales at the retailer. Industry insiders suggest it hasn't been at quite the same pace as trades people buying up tools at hardware stores like Wesfarmers' Bunnings, but it's been heading along at a nice clip.
Morgan Stanley has just upgraded its earnings per share forecasts by between nine and 10 per cent over the 2016 and 2017 period, and has also raised the prospect of some capital management initiatives. It also points to the higher margins for the bigger-ticket hardware items being able to replace sales lost in the software segment. Sales of compact discs and DVDS are in decline across the industry.
Sydney-based Vina Investment Management is also a believer, having lifted its stake to 5.19 per cent in late May.
Macquarie Capital was quick to tip JB Hi-Fi and Harvey Norman as two of the most likely beneficiaries of the tax deductions for small businesses once the budget was announced, and it has been spot on.
The tax breaks are cumulative up to a total of $20,000, run until June 30, 2017 and provide a good backbone for an extended period of strong sales in the computer and small business office hardware section for JB Hi-Fi and its competitors.
It was on May 7 this year that JB Hi-Fi gave a presentation at a Macquarie conference and reaffirmed its full-year guidance of total sales reaching around $3.6 billion for 2014-15, and net profit after tax to be between $127 million to $131 million, and that hasn't been touched.
Big progress
The business has come a long way, with sales reaching an annual $452 million in 2004. The history of retailers around the world has a common thread of the best investment returns for shareholders coming from a well-run business which is in a consistent store rollout phase. JB Hi-Fi still has a little way to go, but is rapidly approaching its stated target of 214 stores in Australia and New Zealand.
By the end of 2014-15 it will be at 187 stores.
The shift into home appliances has been a deliberate strategy to counter an industry decline in the music, DVDS and games segment, with the number of JB Hi-Fi HOME stores set to accelerate from 43 by the end of this financial year, to 75 by the end of 2015-16.
Still, it's a tough game selling fridges, washing machines and coffee machines in a highly competitive market which Murray estimates is worth $4.6 billion. Harvey Norman, The Good Guys, Bing Lee and the higher-end players such as Winning Appliances don't want to cede any ground.
JB Hi-Fi has a solid track record of being ahead of the curve when it comes to making good profits out of categories before they give way to technological advances.
Mr Uechtritz and a Macquarie private equity fund bought JB Hi-Fi in 2000 when it had revenues of $40 million and the chain was something of a seat-of-the-pants operator.
Mr Uechtritz previously made a killing as one of the founders of the Rabbit photo chain of mini-labs in the 1980s, then got out before the advent of digital photography. Rabbit outlets were once everywhere in Australian shopping centres in a sector where Kodak is now the case study around the globe on companies which failed to keep up with rapid technological change.
What are the chances of JB Hi-Fi ever being caught up in a partial bind of this nature? Its product offering is broad and diverse, and has shown it's been able to make the jump each time as the technology shifts happen. It has ridden the successive waves of digital cameras, games consoles, GPS systems, iPods and tablets.
One gadget for all occasions
The "internet of things" is a much bigger concept which industries across the economy are grappling with, and in essence it describes how most people in the future will be able to operate almost all of their household gadgets, entertainment equipment from a handheld smartphone connected back to the internet. Experts say this negates the need for a separate desktop computer, and a tablet.
Global e-commerce giant eBay on June 12 unveiled its thoughts on convergence and the internet of things with some data of its own. The Australian business of eBay said MP3 player sales had fallen on its platforms by 13,800 in 2014 compared with the previous year, while digital camera sales had a year-on-year decline of 8,300 in volumes. DVD and Blu-ray players increased by just 1 per cent. Personal computer sales fell by almost 2 per cent. The firm says its business is an accurate bellwether for what's happening in the consumer electronics industry. In the eBay electronics report, it quotes research firm Telsyte as saying the average Australian household now has eight Internet-connected devices compared with seven last year and that more and more household items such as fridges, security systems, microwaves will shift to being controlled and managed remotely from a central device like a smartphone.
It points to Telsyte research which says that by 2019 less than one in 10 people in Australia with a smartphone will also own a separate MP3 player. If that comes true, there will be fewer individual gadgets around. By that time, JB Hi-Fi will have hit its saturation point in store numbers in Australasia of 214, and will be hoping that its big footprint across the country will mean it is still a popular destination of choice for shoppers pursuing whatever new technology is the hot item. Being the seller of picks and shovels in a mining boom is often a safe bet, but even they get hurt when a cycle turns down.
simon.evans@fairfaxmedia.com.au
Twitter: @SimonMEvans
