What JB Hi-Fi’s result says about Australian consumers’ buying frenzy

Are Australians stress-buying? How else can one reconcile consumer confidence being so weak that it barely has a pulse with shoppers out spending enough to push JB Hi-Fi Australia sales up almost 11 per cent in the three months to the end of June?

It is simplistic to suggest that JB Hi-Fi operates on a retail island. While the consumer electronics group regularly surprises – and sometimes astounds – by significantly beating profit expectations, its strong sales and a group profit result of more than 7 per cent also reflect broader consumer spending patterns.

JB Hi-Fi has surprised analysts with its strong performance.Credit: Roger Stonehouse

Analysts have been patiently waiting for consumers to pair their spending with their sentiment, and the fact that JB beat consensus by 5 per cent suggests that the experts got the timing wrong, suffering premature pessimism.

The JB result may send analysts back to their models to massage the profit expectations for others in the discretionary retail sector. The market certainly had to make some adjustments. By mid-afternoon, JB’s share price had risen 3.5 per cent against a broader half a per cent fall on the Australian share market.

The official June retail sales numbers have not yet been released but commentary from retailers, particularly in apparel, supports data from the ANZ that showed in the final weeks of June, consumers participated in a bout of binge shopping, part of which was clearly in response to the end of financial year sales.

Perhaps this represented the last gasp of frenzied retail shopping. Some posit the strength in apparel sales was a post-lockdown response to the need to replace pyjamas with office clothes and outfits for social events.

But the statistics do show that June’s strong sales were not aberrant. Retail sales rose 0.9 per cent in May, the fifth straight month of growth and double market forecasts of a 0.4 per cent increase.

And JB’s improvement in retail margins suggests that consumers were happy to wear higher prices.

The strength in retail is set against the backdrop of the Reserve Bank raising interest rates in May, June and July, and a sure bet that they will lift again in August.

Depending on which economist is doing the talking, there are another two to three half a percentage point rate increases coming down the pike for the remainder of this calendar year.

Based on continued inflationary pressure and a drum-tight labour market, some economists are even forecasting that a 75 basis point rise is what the RBA has in store for Australians in August.

The minutes from the RBA meeting, released on Tuesday, address this paradox of tenacious consumer spending even in the face of rising rates.

“Timely data indicated that growth in domestic demand had remained solid in the June quarter, led by household spending. Although consumer sentiment had declined notably, household consumption was supported by growth in disposable income, the increase in saving and wealth that occurred earlier in the pandemic, and the rebound in discretionary services spending.”

Two elements explain why consumers have defied wallet-closing expectations, at least until the end of June.

The first and most important is the tight labour market. While this won’t last indefinitely, it does inevitably lead to an improvement in wage growth, a degree of financial security and the ability to service the interest on loans despite rates rising.

The other is the well-documented $260 billion additional stash of cash that Australians are holding in bank accounts, saved during the lockdowns when there was far less to spend it on.

This doesn’t provide immunity to rate rises; it just means many households are less sensitive to higher rates.

That said, there are already some signs that July spending, particularly on discretionary goods and services, is beginning to cool. Various proprietary data sets from institutions including the Commonwealth Bank are pointing in that direction.

And it’s worth noting that JB Hi-Fi, which is already armed with information on its sales for July, was giving no forward-looking hints on how sales in the current quarter of the new financial year are tracking.

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