Executive Summary
This report is an analysis of 2 companies: JB Hi-Fi and David Jones for the purpose of making a sustainable long
term investment in either company.
The analysis that was undertaken includes understanding the history, current operations and differences between
both companies. While both operate within the Australian retail sector, JB Hi-Fi is a speciality discount retailer of
branded home entertainment products and David Jones is an upmarket department store chain with a diverse
offering including cosme#cs, fashion, home wares, furniture, electrical, food and toys.
To add context to the operations of both companies, analysis was undertaken to understand the retail sector
within Australia as well as influences of local and global economic conditions such as the impact of the Global
financial crisis, movements in the Australian dollar and consumer confidence.
The financial statements for both companies from 2008 were examined to understand the financial performance
of the companies looking at key decisions made or events that have occurred over these periods and their
implications on the profitability, operating efficiency, liquidity and financial risk for both companies.
Key highlights included the decision by David Jones to reduce risk by outsourcing their accounts receivables to
American Express as well as more recently outsourcing their electrical departments to Dick Smith and efforts to
reduce excess inventory in recent periods. JB Hi-Fi’s continued its rapid store expansion, acquisitions and
investment into other businesses as well as implementing a strategy to pay down debt before ini#ating a share
buy back in 2011 increasing shareholder value.
Following this analysis it was determined that while the recent performance of JB Hi-Fi is a4rac#ve there are
warning signs of a possible burn out with costly investments into rapid store openings and closures and
diversi*ca#on into new segments such as whitegoods and online music, hence the be4er long term sustainable
investment is David Jones in the interest of a comparatively low-risk, long term sustainable strategy to grow
shareholder value.
Background information
JB Hi-Fi established by Mr John Barbuto (JB) in 1974 but since has been purchased by private equity bankers as
well as being (oated on the Australian Stock Exchange, is a specialty discount retailer of branded home
entertainment products. The group’s products particularly focus on consumer electronics, electrical goods and
software including music, games and movies, with recent investments into diversifying operations into white
goods and other investments.
The product mix is constantly revised to ensure compe##veness. JB Hi-Fi’s reluctance to take on the new devices
illustrates strict product selection. Margin gains derive from scale benefits that reduce the cost of doing business.
Diversi*ca#on into New Zealand is still in its early stage and is not likely to contribute in a meaningful way in the
near term.
The company operates from stand-alone destination sites and shopping centre locations in Australia and New
Zealand with 168 stores growing on average of 13-15 sites per year with an aim of 214 stores, has assets of
$843M, revenue of $3,308M and EBIT of $178M for 2013 financial year (JB Hi-Fi Preliminary Final Report – 2013).
David Jones founded in 1838 by Mr David Jones, a Welsh Immigrant, is an upmarket department store chain
focusing on cosme#cs, fashion, home wares, furniture, electrical, food etc.
Given its diversi*ca#on in retail along with pitching to the top end, it comes as no surprise that Paul Zahra (CEO of
David Jones) announced, “Electrical products have continued being the thorn in David Jones”. This only further
confirmed that consumer electronics is the most difficult category within the department stores broad range
(www.current.com.au).
David Jones operates 35 department stores and 2 warehouse outlets across Australia it has assets of $1,241M,
revenue of $1,868M and EBIT of $154M for 2012 Financial Year (David Jones Annual Report 2012).
General local and global economic conditions
With both companies based within Australia, in comparison to its G20 associates Australia is competing well in
generally tough economic conditions (i.e. slow global economic growth in combination with a de(a#onary
outlook). In April 2013, Australian Consumer confidence fell by 5.1% to an index number of 104.9. This fall
however is still comfortably above the long run average index number of 101. As per the below graph, this fall
comes a;er a rise of 2% in March.
[Source National Australia Bank Business Survey, April 2013]
Within the last 12 months Consumer’s views on current economic conditions led to a decrease of 6.2% in
consumer confidence whilst their expectations about future economic conditions reduced by 4.3%. Their
perspec#ve as to whether the current market poses a good time to buy major household items fell by 7.6% as
they were less than enthusias#c about how the economy will perform year out (-4.5%). Both JB Hi-Fi and David
Jones saw a decrease in EBITDA from FY 2011 to FY 2012, indicating the decrease in consumer confidence over
this period. JB Hi-Fi’s EBITDA decreased from $223.822m to $193.959 whilst David Jones’ EBITDA decreased from
$289.63m to $204.115.
It is suggested that price cuMng may have been a leading factor in the increase in volume of sales at the expense
of profits. Retail prices fell at an annualised rate of 0.7%. This is a reasonable indicia#on of poor Business
Conditionss in the retail industry. (NAB Markets Economy Watch, April 2013). Evidently, the Operating Margin fell
for both companies from FY 2011 to FY 2012 indicating the reduction in profit rela#ve to the sales for the year.
[Source National Australia Bank Business Survey, April 2013]
Growth of the world economy is expected to plateau in the next two years, with expected growth at 3.2% in 2014.
It is advised that uncertainty, mainly due to the post election ‘*scal debate’ question in the U.S. to the Chinese
leadership transi#on and reforms in the Euro Area – will continue to have global impacts in sluggish trade and
tepid foreign direct investment” (conferenceboard.com).
External In&uences on Stock Price Movements
The short-term factors a$ecting the share price for both companies (within the past 12 months):
The Australian and International stock markets head into bear market
territory due to global economic uncertainty. This has resulted in share
price vola#lity due to global economic uncertainty.
Favourable exchange rates have led to cheaper wholesale prices;
however with strong competition for sales, in some cases the need for
discounting has resulted in lower revenues and gross margins .
Uncertainty surrounding future RBA interest rate movements affects
investor’s confidence in equity markets. A lower interest rate may
result in a posi#ve increase in share prices due to an increase in
revenue as Australian households increase their discretionary
spending on consumables. The opposite applies if interest rates
increase (or cuts deferred), as households tend to save more of their
disposable income.
The boom in online shopping has also had a knock on effect for the
bottom line of each company. The strong Australian dollar has seen
consumers turn to the internet to make their purchases, as these
products are often cheaper and GST exempt.
Long-term factors a$ecting the share price for both companies (Greater than 1 year):
The long-term outlook for both companies is cau#ous. Both
companies are affected by the cyclical nature of the Australian
economy that in turn is in(uenced by numerous global factors such
as 1) the con#nua#on of the European debt crisis, 2) poor
performance of the world’s largest economy the USA and 3) the
slowing down of China’s economy, Australia’s largest trading
