Is JB Hi-Fi finally feeling the pressure of Amazon?

Ross Greenwood speaks to JB Hi-Fi CEO Richard Murray about why shares are down, despite posting a 21% increase in half-yearly profit.

Introduction: Is JB Hi-Fi (ASX:JBH) finally feeling the pressure of Amazon?

Ross Greenwood:  One of the companies, it’s been one of the stellar performers over a very long period of time, notwithstanding all sorts of challengings coming from online, international retailers, domestic retailers, is JB HiFi. People would understand the quality of JB HiFi over long period of time is being able to grow not only sales, but also profits as well. Say for example, you’ve just seen it’s half yearly results come out, on the back of that you’ve seen the profit and net profit after tax up by 21%, again very good, $151,7 million. Now, think about the environment in which that’s been earned, say for example, a whole through Amazon but others are coming through in this space. And yet today you found the sharemarket marked down those shares very heavily, the shares in JB HiFi down by 8% today which is a decent fall in a given day and when especially you produced a profit that was right on line with what the analysts have forecast themselves. The share price at the end JB HiFi was down by around $2.25 at the end. A decent fall. What’s behind that but also then the future of electronics good retailing in Australia, the Chief Executive, always great with his time, Richard Murray is on the line right now. Many thanks to your time, Richard.

Interview with: Richard Murray, CEO, JB Hi-Fi

Richard Murray: Thanks Ross for your time this evening.

Ross Greenwood:  Were you a little surprise by the performance of the shares on the market today?

Richard Murray: Results day are always a little bit choppy, sometimes you’re pleasantly surprise and sometimes it feels like a tough day at the office. But I guess the things we’re focused on both at store level, online, and as a broader, company with both the JB and the Good Guys a bit longer term. I guess it’s a little bit annoyed though possibly not the most enjoyable.

Ross Greenwood:  Let’s go to what it was, it seems as though the analyst focused on, and that was, that it would seem those sales growth would grow faster than profit growth which implies in the analyst’s minds that JB HiFi might be giving up some profit margin in order to gain sales. In another words trying to beat off the competitors such as Amazon coming into the marketplace. How real is that from an operational point of view with you running the company?

Richard Murray: We’ve always been focused on the biggest brands at the best prices. I guess what we were saying to the market is there’s– Sales mix which is just the mix of products we sell, there are period where that sales mix has a greater influence on our gross margin. At the moment we’re selling a lot of low margin products, where granted that giving us above every sales growth but those low margin products are a bit heavier mix at the moment and so that does impact our growth margin. But as you seen in the first half we were able to deliver in JB HiFi Australia 10.8% sales growth and 10.9% earnings growth. Now that’s all growth profit only going up 9.8%. While our gross profit grew slower than our sales growth at the earnings line we’re still comfortable and our guidance of 235-240 million for the full year, still up 13 to 15%. I think that says we’re still delivering to our shareholders but also making sure that we deliver to our customer.

Ross Greenwood:  Because the one thing about delivering those to customers is making certain you can try at least head off the whole issue of Amazon. You and I have spoken about that many times before here on the program, but quite clearly it’s not becoming a less competitive environment, if anything, becoming a more competitive environment. Do you think really there is– And also, given that Amazon is so large it’s not disappearing anytime soon, that I guess is the issue of trying to manage JB Hifi in the next 5 and 10 years.

Richard Murray: That’s an absolutely right observation but JB certainly from me to Terry, to Richard Uechtritz , we’ve always been a company that’s had a very clear view on what we’re trying to achieve but the views over medium to long term. We absolutely want to be for JB the first destination our customers in technology and consumer electronics, and for Good Guys is home appliances and consumer electronics. Those market positions have been built up over decade. There’ll be as few short terms ups and downs in a little bit of earning or gross margin here or there but they stands us in good steady in medium term. That position in Australia and you’re hearing in consumer’s mind is critical to our success.

Ross Greenwood:  That said, your online sales grew 40,6% to $119 million now that is still 4.8% of total sales, not big in a whole scheme of things, 4.8%. But at a $119 million and growing by 40% per annum that quite clearly is an increasingly important part of your business.

Richard Murray: We think of online for customers that research. Up to 80% of your customers are now starting that journey online and then some of them transact online. Online is important because it’s a great research tools for our customer and it’s important because our job is to delight our customers where they shop in-store or shop online or click and collects or pick up in store as some people call it, has become even more important. All these, sometimes they’re saying there’s challenges but they also present great opportunities for us to delight our customers. My job and the JB team’s jobs to make sure however customers want to engage with us, they get a great experience. Whether it’s in store or online, our job is to evolve the model to make sure we can do that economically and productively.

Ross Greenwood:  But seriously it seems also that you have not yet penetrated fully the Australian marketplace given the fact that you open seven new JB HiFi physical stores over the past 12 months, now it’s total of 311 stores in Australia and New Zealand. What point do you think you reach the saturation market for the Australian population?

Richard Murray: There are probably a couple of opportunistic stores that dropped in this half, certainly at just over 200 stores for JB and 100 stores for The Good Guys, when I reflect on JB store rollout we are reasonably full, we’re just taking a few opportunities they present. With the relation of The Good Guys there was a few that we would’ve accelerate that role at. At the moment we just want to the core business stabilize post of period of change and then we can think about whether more stores is appropriate for The Good Guys. We definitely think there’s an opportunity, we just want to stabilize the core.

Ross Greenwood:  Hindsight being hindsight, having taken over The Good Guys and getting yourself into it if you like, that bigger category of white goods and electronic goods, do yo believe now that there is synergy in the mix of products that you’re offering and especially long term in the online offer?

Richard Murray: Absolutely. The power of $7 billion worth of sales across both businesses and where that gives us the seat at the global table, for many of our– We’re number one in the region but we’re often on the top five globally. These relationships there supply creates a lot of value with how we bring you products to market, how we can be involved in the launches. Be it online or in store those relationship are really critical.

Ross Greenwood:  Is that not necessarily that relationship you have with those suppliers, one of your greatest defense of all of anybody who’s trying to catch you up, online retailers including Amazon, for example.

Richard Murray: Yes, we’ve got some pretty big companies that are our suppliers and they want to see a competitive and balanced market, both in Australia and overseas, and they also absolutely resonates with them is the in store experience. Yes, you can have some products online and its important to get that right for research, but one of the things that passion, knowledgeable staff in store where customers coming, better informed than never before but then also with some questions they want to really understand and push in to very specific things. That’s where bricks and mortar retail, still, is the go to destination, particularly our categories. While they’re plug and play, There’s also a little bit of complexity in there and that’s what the staff at store level simplify so well for our customers.

Ross Greenwood:  It’s going to be interested to watch it. The group Chief Executive of JB HiFi, always great with his time and Richard Murray, we appreciate it this evening.

Richard Murray: Thanks Ross for your time, appreciate it.

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