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 cosmetics, 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 initiating 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 attractive there are warning signs of a possible burn out with costly investments into rapid store openings and closures and diversification into new segments such as whitegoods and online music, hence the better long term sustainable investment is David Jones in the interest of a comparatively low-risk, long term sustainable strategy to grow shareholder value.
JB Hi-Fi established by Mr John Barbuto (JB) in 1974 but since has been purchased by private equity bankers as well as being floated 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 competitiveness. 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. Diversification 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 cosmetics, fashion, home wares, furniture, electrical, food etc.
Given its diversification 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...
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