Over 18 months ago I wrote an article about JB Hi-Fi (ASX:JBH). At the time it had a StockRank™ of 98 which included a Quality rank of 99. The article included the comment “Analysts are predicting that this streak of revenue increases will finally expire in 2023, but they have been wrong before.” They were wrong again. Revenue increased in FY23 by 4% to mark the 22nd year in a row of increasing revenue. However the streak finally came to an end in FY24 with a small decline of 0.4%.
But when it came to predictions about profits, the analysts community were a bit closer to the money. I wrote, “Most market analysts are forecasting tough times ahead for the major retail stocks with reduced sales and increased costs leading to significant reductions in profits over the next two years.” This did come to pass, with operating profit as well as net profit declining in both FY23 and FY24. The fall in net profit in FY24 was 16.4%.
The decline in net profit was due to increasing cost pressure, with the biggest component being an increase in labour costs of 6.2%, along with rent, administrative expenses and interest expense all increasing.
Despite these challenges, the StockRank remains at 98 with the quality rank having slipped marginally to 97. This reflects the consistently strong long-term performance of key metrics including Return on capital employed (ROCE) consistently in the high 20s or above, the long-term average free cash flow to assets above 19%, and consistent sales growth along with the conservatively managed balance sheet.
Given that analysts were correct and normalised EPS declined from $4.80 to $4.01, a fall of 16%, you would expect the share price would have also travelled in a similar direction, but you would be wrong. The share price has risen about 70%.
So if revenue is flat and profits have fallen, why has the share price risen so much?
The first point to note is that the share price rallied 13.2% in the three days following the release of the FY24 earnings announcement. This reflected three main things. One, things weren’t quite as bad as people were expecting. Two, the forward outlook was stronger than expected with sales figures for the month of July, quite strong. Three, they announced a special dividend of 80 cents…
