Remember a little while back when retail trade seemed ready to cave in on itself? Even the very weather – a warm winter start – was against it.
I believe that is now going to change for the better, especially for JB Hi-Fi Limited (ASX: JBH). Here's why.
The stock hit a high in early November 2013 around $23, then over the next seven months slid down to as low as $17.56 in June. Now it is $19.75, or up about 12.4%, while the S&P/ASX 200 Index (ASX: ^XJO) only rose about 1.6% since mid-June. Why the rise?
In June, the company announced it expects a full year earnings increase of 8.3% – 10.8%. This was after it pulled off a 10% interim net profit gain when other retailers were struggling.
If business sentiment picks up more, that could flow onto employees working more. That in turn could have a knock-on effect to consumer confidence and spending.
Other market factors are:
— The Federal budget is now old news- the shock is over and shoppers are starting to think about sales.
— Interest rates may stay lower for longer, which benefits both businesses and consumers.
— The housing market is still picking up and will expand growth to more areas outside of major property markets. More people will be buying appliances, electronics and other household items for new homes. That plays right up to JB Hi-Fi.
Harvey Norman Holdings Limited (ASX: HVN), retailer of home furnishings, computers, electronics and appliances, could be said to be have the same tailwinds and a lot of its goods are similar to JB Hi-Fi. It also had a better half year result.
But the big difference for me is JB Hi-Fi's return on equity that is usually above 40%, whereas Harvey Norman's is about 9%. It gets more earnings bang for its net asset buck and that can also be a driver of share prices.
If JB Hi-Fi can hit its profit guidance, then the market could take it higher. We seem to be going into a stronger economy rather than a weaker one and strong performing retailers like JB Hi-Fi will benefit from that.
