Analysts cool on retailers JB Hi-Fi and Harvey Norman as Amazon’s Australian expansion powers on

Experts are starting to cool on retailers Harvey Norman and JB Hi-Fi after their COVID-19 dream run, with competition from a global giant looming large.

Online retail giant Amazon is expanding rapidly in Australia and giving electronics retailers JB Hi-Fi and Harvey Norman a headache. So are those stocks looking overpriced?

Morningstar certainly thinks so, saying the market’s optimism for Aussie electronics retailers is at odds with Amazon’s robust expansion plans.

The financial services firm estimates Amazon’s Australian gross merchandise value grew at about three times faster than JB Hi-Fi and Harvey Norman’s sales last year and forecasts the New York Stock Exchange-listed behemoth will nearly triple its local footprint in 2021.

By 2030, it will account for about 25 per cent of Australian online retail sales, with the categories it excels in globally being consumer electronics and books.

The most exposed companies to Amazon within Morningstar’s coverage are JB Hi-Fi, Harvey Norman and Kogan, which last month booked a 164 per cent surge in net profit for the six months ending December 31 to $23.6m.

Harvey Norman shares are just shy of $6, but Morningstar values them at $3.60. Picture: NCA NewsWire/Dean Martin

Harvey Norman, in particular, had a stellar run during the pandemic, posting record financial results last month – more than doubling its first-half net profit to $462m and extinguishing its debt.

JB Hi-Fi also chalked up a record half-year result, with net profit surging more than 86 per cent to $317.7m.

While the Gerry Harvey-led franchise attributed its success during the health crisis to spaciousness in stores and easy parking, JB Hi-Fi’s online sales rocketed 162 per cent.

From Morningstar’s perspective, Australian retailers with the greatest e-commerce performance will fare the best as they battle to counter Amazon’s epic threat.

“As an online pure-play, we anticipate Kogan to grow in line with the overall online channel and increase its market share of the total category sales,” the group said.

“We continue to expect JB Hi-Fi, including its The Good Guys chain, and Harvey Norman’s Australian franchisee network to retain their market shares in Australia, but it is unlikely the two omnichannel retailers will grow sales ahead of the overall consumer electronics and appliances market.

JB Hi-Fi shares closed at a record $53.96 on Friday. Picture: NCA NewsWire/Joel Carrett

“We anticipate their large physical store sales to significantly underperform longer term and present a headwind to their omnichannel sales growth.”

Amazon would continue growing faster than the competition in the medium term, Morningstar said, driving consolidation in the consumer electronics market and hindering JB Hi-Fi and Harvey Norman from sustainably increasing their market shares.

While COVID-19 restrictions and unsustainable government wage subsidies had driven massive shifts in consumer spending towards goods and away from services, that was only a temporary boost, but JB Hi-Fi, Harvey Norman and Kogan share prices implied elevated sales would continue, the group said.

Harvey Norman shares are just shy of $6, not far from their highest of more than $6.50 in 2007 while JB Hi-Fi shares had a record close of $53.96 just last week.

Kogan, on the other hand, peaked at almost $25 in October and was $12.63 in intraday trade on Monday.

Amazon last month bought Australia-based e-commerce platform Selz, which enables businesses to build their own online stores. Picture: David Becker/AFP

Morningstar has delivered a brutal assessment of all three, giving Kogan a fair value estimate of $11.20, JB Hi-Fi $30 and Harvey Norman just $3.60.

Morgan Stanley also says it has a “more cautious stance within the household goods space”, noting JB Hi-Fi and Harvey Norman significantly outperformed the ASX 200 in the past year.

It believes the vaccine rollout gathering steam and the assumed resumption of international travel from the first half of the 2022 financial year at about 20 per cent of the usual rate “will be a catalyst for wallet share normalisation”.

“We think now is the time to neutralise net exposure to the electronics/home goods retailers,” Morgan Stanley said in a research note on Monday.