Why JB Hi-Fi is stepping into your bathroom and out of its comfort zone
For those that haven’t heard of homewares retailer e&s, megabrand JB Hi-Fi is about to change all that. This is why.
Between driving monthly sales, Terry Smart has one eye on the bigger picture for his home electronics and appliances powerhouse, and that’s why he made a small but significant bet that takes JB Hi-Fi out of its comfort zone.
That is the driver behind a $47.8m buyout of a 75 per cent stake of up-market kitchen and bathroom products retailer e&s.
For a retailer whose DNA is built on moving flat screen TVs and mobile phones, getting into kitchen bench tops, fancy taps and expensive toilets is a big sidestep.
Much of the country is unlikely to have heard of e&s, or seen its airy showrooms and orange facades across Melbourne’s suburbs. That’s all about to change.
Just as JB Hi-Fi was unleashed from East Keilor into every corner of the country and beyond, Smart is betting on an interstate rollout to deliver the growth in his newest acquisition.
And timing is important. Where JB Hi-Fi and its associated Good Guys business appeals to existing homeowners as well as renters or anyone that needs a laptop or mobile, e&s goes much deeper into the home.
It plays right into the structural long-run shortage in the nation’s housing market.
With the need for a million additional homes by the end of the decade, as well as the renovation needs of existing ageing housing stock, e&s gives JB an entry into the coming boom.
The buyout too comes as expansion of JB’s flagship brand is maturing. It’s starting to run out of shopping malls and homemaker centres in which to open new outlets. And while e&s is never going to replace JB’s earnings power, it gives an opportunity to carve out a new growth option.
“We do need to think longer term and look through the cycle,” Smart tells The Australian.
“And if you’re going to be involved in a business that is targeting the builders’ market, then this is the one that we want to be involved in. We just see that in the future this business can continue to grow. It can grow interstate. And that’s the real appeal, and that’s where we see the growth opportunity.”
The buyout is a modest deal to be sure. The 75 per cent stake values e&s in full at around $64m.
JB Hi-Fi has an option to buy the remaining 25 per cent stake by the end of 2029.
By comparison, in 2016 JB Hi-Fi paid $870m for the Good Guys. Valuations in retailing have come off – the Good Guys was acquired at 11.7-times enterprise value to annual earnings, while e&s represents a little over 9.2 times earnings.
JB Hi-Fi is a retailer that has rarely put a step wrong in recent years, so what can go wrong? The deal – albeit modest – is a shift from JB’s fundamental business model. That is, running at lowest-cost as possible and turning this into a competitive advantage. This, in turn, keeps prices down and sales strong.
Walk into any JB Hi-Fi store or Good Guys, there’s stock screaming out at you everywhere. The extraordinarily high sales per square metre is part of the secret sauce to JB Hi-Fi’s productivity.
e&s’s ambient showrooms are the exact opposite. This suggests the new business runs at a lower margin than what JB Hi-Fi or its investors will be comfortable with. So too, e&s goes for style over deep discounting, where JB Hi-Fi has built a business model moving product as fast as possible.
Where there is overlap between JB Hi-Fi and The Good Guys which made the back end of integration and warehousing easier, here there are very few overlaps.
e&s plays in the very premium end of bathroom and big kitchen and laundry appliances. However, the brands work on exclusive supplier links and staying front of mind when it comes to shoppers making big and sometimes emotional purchases.
Still, Smart says the deal gives him access to a new customer segment as well as new products like premium home appliance and bathroom.
Importantly, it gives him access to large commercial builders, as well as boutique builders, renovators and architects. There’s also an opportunity to cross-sell a large television or refrigerator down the track.
There are currently 10 e&s stores across Victoria, and an online store on offer. And the ACT is about to be the first stop in a national expansion through a loyalty scheme.
Although small change, it’s worth remembering retail mergers are notoriously tricky to pull off.
Indeed, the Good Guys took years to find momentum, with its sales growth lagging and costs base much higher than the flagship JB Hi-Fi brand. It was only through the Covid pandemic and a hands-on management overhaul that Good Guys showed its strength.
The investment spend in rolling out a national e&s footprint will be significant, this could come at the cost of reinvestment or driving down costs further in the Good Guys or JB Hi-Fi. But Smart is backing on the sales upside.
e&s has been owned and operated by Victoria’s Sinclair family for more than six decades. They will continue to have input in the operating business. Rob Sinclair, who oversaw much of the modern growth of e&s and does his own television ads, will stay on as managing director. The ads will now be taken to a national audience.
Smart says Sinclair represents the best fit for e&s’ expansion. Sinclair has worked with the suppliers and knows the market inside out. As e&s grows, so too, the Sinclair family will share in the upside.
Sales up
The e&s deal comes as JB Hi-Fi continues to defy gravity in its flagship business. It posted another increase in full year sales in the face of a tough retail economy. Momentum improved through the June quarter and continued into the new financial year. Sales in July under the JB brand were up 5.6 per cent without resorting to aggressive discounting. Even the Good Guys had one of its strongest Julys of recent years, with July sales up nearly 3 per cent. Smart says it’s still too early to tell if the tax cuts were starting to drive spending.
The strong sales numbers were behind an 8.3 per cent jump in JB Hi-Fi’s shares pushing the retailer to a fresh record high of $72.98. Many were expecting bad news coming into the full year result.
Still, JB’s headline earnings were down 15.8 per cent at $647.2m, hurt by a slower first half. This also weighed on dividends, which were down 16 per cent at $2.51 a share. But JB opted to bolster this with an 80 cent per share, or $200m, special dividend, sending some of its excess cash back to investors.
Smart says the customers are still there. “What we are seeing is people are reacting much more strongly to promotional events. So they’re really driving to find the best value for their money.”
Products like computers, mobile phones and even televisions with artificial intelligence features are now just starting to hit the market and this is expected to deliver the next boost for JB Hi-Fi.
And when it comes to talk about interest rates holding higher for longer, Smart remains the consummate retailer.
“We don’t let the economic outlook restrict ourselves. There may be fewer shoppers out there in the market, but those that are buying, all we want to do is work hard to ensure they buy from us”.
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