JB Hi-Fi shares plummet 11% after shock profit downgrade

JB Hi-Fi shares have plummeted over 11% this morning after the electronics retailer announced a shock profit downgrade for the first half of the year, saying price deflation is just too much to handle.

Chief executive Terry Smart announced yesterday EBIT for the first half will be around 5% lower than last year’s, subject to Christmas trading.

But analysts suggest the challenging times aren’t isolated to JB Hi-Fi, pointing to a number of other electronics giants including Dick Smith and Harvey Norman that are no doubt suffering under the same pressures.

City Index chief market analyst Peter Esho told SmartCompany this morning the electronics industry is suffering as the functions of several products combine into just a few.

“This results in fewer products with lower margins. And even if you do sell a lot of them, you’re not making as much money as you did before.”

“If you look at JB Hi-Fi stores, they’re 1,200 square metres, and a lot of that is taken up by DVDs and CDs. If you look at the rest of the floor space, it’s consumer electronics – and that is suffering massive price deflation.”

Although JB Hi-Fi chief executive Terry Smart announced sales growth for the first five months of the year of 7.8%, same-store sales have fallen by 1.8%.

Smart noted price deflation per unit running at between 20-25% for televisions, despite growth in the number of panels sold.

“Sales in the second quarter have improved but unfortunately not enough to counter the impact of the first quarter decline in sales and margin driven in large measure by a high level of discounting in the market, with some retailers pricing inventory below cost to drive foot traffic and/or clear excess inventory.”

“Throughout this period we have maintained our low price promise to customers and, as a result, our gross margin has been impacted by 27 basis points for the five months to November 30, 2011 against the prior year.”

Esho says this is the beginning of what he believes will be a challenging year.

“Prices will keep falling, and people don’t necessarily want to embrace new technology unless it’s absolutely revolutionary. What’s the point of buying a $3,000 dollar television when you can buy the $500 version that looks almost or just as good?”

“Televisions are becoming a commodity. And like any other commodity, it’s hard to charge a premium unless it’s revolutionary.”

JB Hi-Fi has been the bastion for retailers over the past few years, delivering consistent profits and sales growth. But Esho says that will become harder to maintain.

“They’re in a hard situation. Where do they go from here? Online sales are up 80%, and that’s good, but there’s still a lot they have to deal with.”

“In terms of the pipeline over the next few years, there’s not a huge amount of products coming up.”

The announcement comes after Harvey Norman chairman Gerry Harvey has continually warned of price deflation, saying it is continually putting pressure on the company.