E-commerce And DTC Rivals Will Crush Brick-And-Mortar Margins

Key Takeaways

• Intensifying online competition and direct-to-consumer sales are eroding JB Hi-Fi's market share, pricing power, and profitability.
  
• Market saturation and shifting consumer trends limit future revenue growth and place persistent pressure on margins.
  
• Growth in technology demand, strategic acquisitions, multichannel sales, operational efficiency, and focus on innovative products position JB Hi-Fi for sustained revenue and margin expansion.

Catalysts

JB Hi-Fi Limited retails home consumer products.

• The acceleration of e-commerce and digital-native competitors is eroding JB Hi-Fi's long-term brick-and-mortar advantage, with heightened online competition from major global platforms increasingly cannibalizing store traffic and market share, placing persistent pressure on future revenue growth.
  
• The proliferation of direct-to-consumer models from electronics manufacturers such as Apple and Samsung is bypassing traditional retail channels, restricting JB Hi-Fi's pricing power and compressing net margins as brands capture a greater share of the value chain.
  
• Shifting consumer preferences towards subscription and rental models for electronics, along with increased price transparency and commoditization of consumer tech, are likely to reduce the volume of traditional retail sales and exert sustained downward pressure on gross margins and earnings quality over time.
  
• Notwithstanding solid recent results, the company's growth prospects are constrained by market saturation in Australia and New Zealand, limiting scalability and placing a structural ceiling on future revenue expansion and long-term EBIT growth.
  
• Ongoing margin dilution, already evidenced by recent declines in gross margin due to aggressive in-store discounting and competitive activity, will continue as sector-wide promotions intensify and inventory risks rise from rapid product cycles, likely compressing net profit margins and reducing earnings stability in the years ahead.

JB Hi-Fi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on JB Hi-Fi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming JB Hi-Fi's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.6% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach A$471.4 million (and earnings per share of A$4.29) by about July 2028, up from A$459.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 25.5x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 23.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

JB Hi-Fi Future Earnings Per Share Growth

Risks

• The ongoing growth in technology adoption-including demand for AI-enabled devices, large-screen televisions, and smart home appliances-continues to drive strong sales and unit growth across JB Hi-Fi's core categories, which supports resilient revenue and could underpin long-term earnings growth.
  
• Expansion into premium home appliances through the acquisition of e&s, along with broader access to commercial customers and builders, opens new revenue streams and broadens the customer base, potentially increasing total group revenues and providing additional margin upside as synergies are realized.
  
• The company's multichannel strategy combines strong e-commerce (with significant growth in online sales, now over 17% of group sales) alongside well-located physical stores, maximizing customer convenience and allowing JB Hi-Fi to maintain and grow market share, supporting both sales volumes and profitability.
  
• Management's disciplined cost control and operational efficiency efforts, as reflected in a consistently low cost of doing business and a strong balance sheet with high net cash, provide JB Hi-Fi with resilience and flexibility to withstand periods of margin pressure, ultimately aiding the maintenance or improvement of net margins and earnings.
  
• Fast product innovation cycles in consumer electronics, along with a clear company focus on merchandising growth categories and leveraging new tech cycles (such as AI/ML and 5G devices), increase both average selling prices and transaction volumes, likely supporting future gross profit and top-line growth if these trends persist.

Valuation

• The assumed bearish price target for JB Hi-Fi is A$57.09, which represents two standard deviations below the consensus price target of A$94.85. This valuation is based on what can be assumed as the expectations of JB Hi-Fi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$120.0, and the most bearish reporting a price target of just A$44.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$11.8 billion, earnings will come to A$471.4 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$107.13, the bearish analyst price target of A$57.09 is 87.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.