Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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The changing retail environment that JB Hi-Fi must negotiate has taken a back seat in the minds of investors, many of whom are almost singularly focused on events unfolding in the US and Europe. Value.able Graduates, I am proud to report, remain focused on the business.
Australia’s retail environment is in a state of flux. The only thing that is permanent is that the retail environment is always in a state of flux!
Success however for retailers who don’t own their own brands is always based on the same recipe – low costs, the right products and the right prices irrespective of what the market is doing.
JBH doesn’t shift its brand positioning. It is known as the “value” player in the electronics retail market. Its sells exactly the same big brands as its rivals, such as Harvey Norman and the Good Guys, but has won mind share as the low-price alternative. Its low-end branding and cheap shop fittings is particularly helpful when consumers start zipping up their wallets.
JBH sold $2.9 billion dollars worth of gadgets, music and games in 2011, up 8.35 per cent from $2.73 billion the year before. The company’s headline profit was down 7.6 per cent to $109 million (at the lower end of its guidance range) and compares to $118.7 million the previous year. Excluding the Clive Anthony’s write-down, the result was $134.4 million, which is up 13.3 per cent. EBIT grew by almost 12%. Like for like hardware sales were up about 4%, which compared to the industry-wide number being down about 4% suggests the company is continuing its habit of winning market share. The final dividend of 29 cents per share ensures the payout ratio remains at 60 per cent. Aggregate sales grew 8.3 per cent while same store sales were down 1.2 per cent (Australia was down -0.5 per cent and New Zealand up 2.4 per cent). Second half like-for-like sales were up 0.1 per cent for JBH, but down 14.8 per cent for Clive Anthony’s.
Costs remain under control with the CODB (Cost of doing business) at 14.5 per cent – unchanged for the year (but up from 13.2 per cent in the recent past), and the EBIT margin rising to 6.6 per cent. Gross margin rose to 22 per cent – but I have to confess I prefer to see gross margin falling as it further entrenches competitive advantage.
Sales and marketing expenses rose by 8.2% – in line with group sales but occupancy expenses rose by 13%. This could suggests the tail end of store openings – second tier and the company is not getting as attractive terms.
A $73.4 million increase in inventory – largely due to new stores (but requires more investigation because the company says $49.1 million was invested in new store inventory but last year the jump was just $10 million) – resulted in cash flow from operations of $109.9 million compared to $152.1 million last year. Capex of $45.1 million relating to the opening of 18 new stores also needs to be considered in any cash flow analysis. The buyback of 10 million shares pushed borrowings up from $70 million to $232 million, which will have an impact on free cash flow for the next few years, but contributed to the fact that $260 million was returned to shareholders this year.
My business cash flow is a positive $71.2 million and then $88 million was paid in dividends.
Eighteen stores were opened and four Clive Anthony stores were converted. The expectation is that there are another 62 stores to open, at a rate of 13-15 stores per year. If we assume 2-3 per cent sales growth and another 4-5 years before reaching the targeted number of stores, sales in 2016 could be $4.5 billion. And if current NPAT margins are maintained, JB Hi-Fi could be reporting profits of $204 million, which is equivalent to a compounded growth rate of 11% per annum and earnings per share of $2.08 per share in four years. And that expectation assumes no improvement in retail conditions (nor any deterioration either).
The big story however is that Terry Smart will need to start looking beyond this organic growth to other strategies if JB Hi-Fi is to avoid developing the profile of another mature Australian retail business like Harvey Norman.
On that front, JB Hi-Fi will release a streaming music service by the end of the year – a challenger for iTunes. They already have 800,000 unique weekly visits to their website so before you dismiss its chances, remember this: consumers will be unlimited in terms of the devices that music can be “streamed” to. The service will be a ‘playlist’ service much like GrooveShark, which is discussed regularly amongst the team here at Montgomery HQ. There will be 6-8 million tracks from 100,000 artists at launch and one expects, if it catches on, a small investment could lead to deals with concert promoters and outdoor entertainment events – wherever teens congregate to listen to music. JB Hi-Fi needs to establish new and emerging business models to try and counter the shift away from physical music unit sales.
Having said that, the current sales environment is probably not representative of the future. Share market investors generally use the rear view mirror when assessing the future. I have previously discussed the “economics of enough”, which David Bussau from Opportunity International introduced me to many years ago. As it applies to consumers generally, they will get sick of trying to keep up with the latest technology, be happy with their TVs and replace everything less often – opting instead to ‘experience’ travel, food, adventure and other cultures. That of course doesn’t mean JB can’t grow its share-of-wallet. In the face of declining retail sales volume growth over the last five to ten years and deflation, JB is proving it is already the market leader.
The announcement was overshadowed by the July stats. Being ‘actuals’ the company was in a position to report them. Same store sales were negative 3.3 per cent, but aggregate sales were up 6.4 per cent. The like-for-like decline was partly attributed to the company ‘cycling’ the release of the iPhone 4.
As I have said before I don’t think the current retail malaise will continue forever and JB will emerge stronger and with more market share when we come out the other side of this consumption ‘funk’.
JB Hi-Fi’s quality score dropped from A1 to A3 and interestingly, this was only partly due to the increase in debt. (We really need to know whether it was just timing issues and new stores that contributed to the jump in inventory).
Furthermore, our estimated valuation for 2012 is now $17.30, rising to $20.30 in 2013.
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Then come back here to our Insights blog and share your findings.
Very soon, finding extraordinary companies offering large safety margins will become simple and may I even suggest, enjoyable. The next-generation A1 service my team and I have created will inspire your investing and re-energise your portfolio. (Value.able Graduates – your invitation to pre-register is imminent).
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have; 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our next-generation A1 service).
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 9 August 2011.
The Australian share market and dollar have staged spectacular turnarounds, with All ordinaries index rising phoenix-like from falls of more than 5 per cent to finish with a 1 per cent gain. Fund Manager, Roger Montgomery reveals his thoughts following the market turnaround. Read the article.
In light of the market downturn, Roger Montgomery is finding bargains in extraordinary companies that are trading at discounts to their intrinsic values. In this interview with Ross Greenwood, Roger shares his thoughts on Macquarie Bank (MQG) and Zicom (ASX:ZGL). Roger also reveals which A1 and A2 MQR (Montgomery quality rating) companies are trading at discounts to their intrinsic values. Listen to the podcast.
It’s a common question. Stockbroker recommendations often travel from ‘Buy’ to ‘Hold’ then back to ‘Buy’, and then all of a sudden ‘Ceasing Coverage’ appears. Rarely is a ‘Sell’ mentioned, let alone maintained for any length of time.
So the question remains… should you sell after the stock market has fallen 511 points? Or when the share price of an extraordinary A1 business falls by as much as 26 per cent?
“Of course not, Roger!”, I hear Value.able Graduates shouting from the rooftops across the country.
In Chapter 13 of Value.able I describe my five rules for when to sell. In this video, I will elaborate on Rule # 1: No junk policy.
I will assume 1. You are a Value.able Graduate, 2. You have changed some part of the way you think about the stock market. I will also assume you can confidently pick an A1 company from a basket of so-called ‘blue chips’.
Your mission: Go through your portfolio. Turn the stock market off and look at the businesses you own. Are you blessed with A1s? Or is your portfolio full of ‘blue chips’ that fail to make the A1 grade?
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).
Value.able TV #3 was recorded at Montgomery HQ on 5 August 2011.
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 9 August 2011.
The US stockmarket had its biggest one day selloff since the GFC last night.
Back on 1 December 2008 the Dow Jones plunged 679.95 points. Last night the US market dropped 511 points – that’s a 4.31% decline. All 2011 gains were wiped out.
The Dow Jones Index is now down 10 per cent since May. The US is officially in recession territory.
Humans instinctively have an aversion to a debt crisis, but not a solution. And how do investors (not Value.able Graduates) react in such an environment? With fear. And it is that fear that drove our market down 4 per cent today.
But has anything significantly changed that would result in the intrinsic value of Decmil falling 12 per cent since yesterday? I will let you judge and respond accordingly.
Value.able Graduates, stick to our mantra: put together a portfolio of extraordinary A1 businesses that you believe will be much more valuable in five, ten or twenty years time.
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 5 August 2011.
Industrial stocks are finding life much tougher than miners as the high dollar and subdued consumer demand take their toll on earnings. Roger Montgomery of Montgomery Investment Management told ABC reporter Andrew Robertson what impact he thinks this will have on retail brands including Oroton and JB Hi-Fi. Read the article.
If you had $100,000 to invest in the stock market, betting the farm on one hot tip could turn your $100,000 to $5 million, but its more likely to wipe you out. An option is to slowly, carefully build a portfolio that, over time is almost certain to beat the market. First recognise the best companies. We call these A1 businesses. If you invest in extraordinary businesses at prices less than they’re worth, you are on your way. Roger Montgomery shares his investing philosophy. Read Roger’s article.
You have never made a profit in the stock market until you have sold. Despite this, many investors focus solely on what shares to buy and what price should be paid. But what about when to sell? Roger Montgomery says that you will eventually lose money, irrespective of the price you paid, if you continue to hold shares in poor performing businesses. At his recent ASX Investor Hour in Melbourne, Roger explained four of his five reasons for selling shares – even those businesses that achieve his top A1 Quality Rating. Listen to the podcast.
I never dreamed a simple little question about the title of a video series would have sparked almost 300 comments. Thank you!
Your suggestions have been entertaining, insightful, and in some cases, ingenious. It has been wonderful to meet so many new Value.able Graduates, and also those of you who have observed from afar (for far too long!).
Here are some of our favourites…
Montyvision, Mike
Video.able, Ben
Montcommentary, Emily
The Value.able Low.Down, Sean
Cooking with Roger, Chris L
Value.Cast, Tim P
Report.Able (Peter
Roger Direct (Matthew R
Roger’s Montgom-o-logue, Robert F
Value.Blast, Rob
Rogernomics, Tony
RMTV, Tim
Value.Bytes, SapporoSteve
Roger’s 2 Cents, Anthony
Value.View, Craig
Value.vision, Jonesy
Value.able report, Orlando
Report.Able, Rod
Value.judgment, Mike
Invaluable insights, Lloyd
InCompany, MarkH
Vis.able, Grover
The Value.able View, Ken F
Talking Cents, Bruno
Video.ables, Nolan
Crunch Time, Brian A
Value.able Vision, Chris L
The Value.able Report, Ian
View from the Mont, Stuart
Value.Log, David
The Montgomery ReTort, Kim
Cents.Ability, Stephen
So without any further ado, the winner is… Value.able TV.
Mark came very close with Value.TV, however it was the final suggestion from Greg (and reassurance from Brad 17) that we have selected as the winner. Greg – I’ll personally sign you First Edition copy of Value.able when I return from Melbourne tomorrow afternoon.
Tune in later this week (maybe early next week) for Episode 2.
If you are yet to join the Graduate Class, click here to order your copy of Value.able immediately. Once you have 1. read Value.able and 2. changed some part of the way you think about the stock market, my team and I will be delighted to officially welcome you as a Graduate of the Class of 2011 (and invite you to become a founding member of our soon-to-be-released next-generation A1 service).
Posted by Roger Montgomery and his A1 team, fund managers and creators of the next-generation A1 service for stock market investors, 29 July 2011.
In case you’ve missed it, Australia’s leading retailers have been putting up a brave fight against the evil spectres of online shopping and a record high savings rate. Forecasts have been slashed and investors have deserted the sector in droves. But weak retail conditions won’t last forever, making some stocks look like big buys. Read Roger’s article at www.eurkeareport.com.au.
