Jb Hi-Fi Report

Executive Summary The purpose of this report is to evaluate the findings of an analysis conducted on JB Hi-Fi (JBH). This evaluation will be assessed to present a recommendation to acquire shares to add to an investment portfolio. This report will assess JBH relative to profitability, asset efficiency, liquidity, capital structure a BSBFIA402A REPORT ON FINANICIAL ACTIVITY DANIELO FRUSCIANTE BUSINESS REPORT JB Hi-Fi (JBH) Company Profile Sector: Services Industry: Specialty Retail, Other Public Company: Share holders A public ltd company sells theirs shares through the stock exchange.

Companies can have a full quotation put on the stock exchange so their share prices appear on the dealers screens. The main advantage of selling shares on the stock exchange is that large amounts of capital can be raised very quickly. A disadvantage is that a business can be taken over if a large amount of shares are bought in a take over bid. It also cost alot to have shares quoted on the stock exchange. JB Hi-Fi Limited (JBH) is a specialty discount retailer of branded home entertainment products. The Group’s products fall in into consumer electronics, car sound systems, music, DVDs and white goods.

JBH does not operate a warehouse; instead all stock is delivered directly to each retail outlet and largely stored on the shop floor. JBH uses its size and mix of high growth categories to increase its buying and advertising synergies. They are focused on growth, opening 39 stores in the past 2 years and a securing another 18 sites set to open in the 2009/2010 financial year. As of the 30th of June 2009, the company had 123 stores operating around Australia and New Zealand. (106 branded JB Hi-Fi) JBH delivered another record result in 2009 with sales up 27. %on the prior year, EBIT growth of 39% and NPAT growth of 45% at year-end. This was achieved through a combination of strong comparative store sales growth and a continued expansion of its product offering. JB Hi-Fi presents itself as a company that is profitable, highly efficient in relation to operational performance, liquid relative to its business model and capable of company and shareholder growth. Profitability Analysis 2009 2008 2007 |Return on equity 41. 19% 39. 71% 35. 1% |Return on assets 15. 12% 13. 36% 10. 17% |Gross profit margin 21. 63% 21. 86% 22. 11% |Profit margin 5. 46% 4. 63% 4. 05% JBH have a strong net income return relative to the percentage of shareholders invested equity, displaying a 13. 3% growth over the assessed period. This optimistic growth pattern presents itself to be highly favorable to investors.

JBH further add to their capacity to profit displaying a 32. 74% increase in its ability to generate income from its asset investments. The fact that both the ROE and ROA display growth indicates positive operational performance. Gross profit margins are stable with only slight fluctuations over the assessed period indicating a confident business model and pricing structure. An increase of 25. 82% of cash flow generated by each sales revenue dollar further confirms JBH’s capacity to be profitable. Despite the positive profits and growth that JBH present over this assessed eriod, caution needs to be advised for future performance expectations. Analysts are predicting tough times may be ahead for retailers as the impact from the financial stimulus fades, and uncertainty surrounding the condition of the Australian economy. Analyst’s further voice concerns that as interest rates continue to rise in 2010 that there will be less disposable income for families and spending habits will tighten. (Symons, 2010) Richard Uechtritz, JB Hi-Fi’s CEO provides confidence by stating that JBH’s strong performance history provides investor confidence in their business.

The company continued to grow through the recession of the 1990’s and has continued to do so since the onset of the global financial crisis. The performance of the company during these periods highlights the strength of its business model. (JBH Annual Report, 2009) Asset Efficiency Analysis 2009 2008 2007 |Asset turnover ratio 3. 517 3. 412 2. 827 |Days inventory 50. 9 54. 27 60. 17 |Days receivables 2. 7 2. 73 3. 89 |Days payable 42. 97 39. 3 52. 76 |Times Inventory Turnover 5. 6196 5. 2556 4. 7279 JBH’s ability to generate income per dollar from its assets has increased by 19. 62% over the reviewed period, reflecting a positive improving result. JBH do not have a distribution warehouse, instead the company holds all stock, in store, displayed on the floor. This approach makes for a lean system, which eliminates over ordering.

JBH’s asset efficiency ratios indicate that they are efficient in selling as well as collecting money from sales. The figures further indicate that it is getting better at refinement. A reduction of 15. 41% in the time taken to sell inventory and a 31. 36% increase in receiving income from inventory sales. These figures further re-enforce JBH’s focus on refining waste and improving operations. JBH’s capacity to generate income from inventory is positive allowing the company to pay its debtors promptly. Throughout the assessed period they have recorded a reduction in the time taken to pay debtors of 18. 6% and averaging a 45-day payment period. JBH’s pursuit to identify, eliminate waste and to improve productivity has resulted in a reduction in CODB of 1. 5% and at current levels believe that it is the most productive model of any of the listed retailers. (JBH Annual Report, 2009) Liquidity Analysis 2009 2008 2007 |Quick Ratio 0. 31 0. 24 0. 34 |Current Ratio 1. 32 1. 35 1. 35 |Cash Flow Ratio 0. 497 0. 1779 0. 3058 JBH’s Liquidity analysis is indicative of its highly refined business model. JBH have the capacity to meet all short-term obligations with inventory held without over investing in working capital. JBH’s ability to efficiently cycle inventory supports their system. Further reassurance is provided with their capacity to pay due debt as expressed in the previous analysis. JBH’s balance sheet indicates that there has been a 32. 86% increase in inventory purchased by the company, this being its most predominant investment relative to reported total assets.

Although JBH experienced a reduction of 41% in its cash flows in the 2007-2008 period, it has been quick to rectify it with substantial growth in 2009 up 60. 44% from 2008, a very strong result. Despite JBH’s aggressive expansion over the assessed period, they have managed to keep a very strong balance sheet. Gearing has been kept low and working capital has remained strong thanks to good stock and inventory management. (Thomson, 2010) Capital Structure Analysis 2009 2008 2007 |Debt to equity ratio 188. 61% 226. 95% 281. 4% |Debt ratio 65. 35% 69. 41% 73. 80% |Equity ratio 34. 65% 30. 59% 26. 20% |Interest coverage ratio 7. 82 49. 27 32. 78 |Debt coverage ratio 0. 7465 3. 144 1. 9554 | | JBH Sector All Ords. Interest cover 17. 67 10. 32 4 The Capital structure analysis shows that JBH choose to fund their investments with debt rather than equity. This is advantageous as debt is cheaper than equity funding. Interest and cash debt coverage ratios position JBH in an exceptional position, detailing that if necessary the company would be able to pay off all non-current liabilities with net cash flows from operating activities in under a year. This has been made possible by strong performance particularly within the 2008 – 2009 period.

Interest cover sits at 17. 67 which is positive relative to its competitors at 10. 32 and the All Ords of 4. This data indicates that JBH is in a strong position to pay its debts again presenting a positive sign as an investment opportunity. Market Performance Analysis 2009 2008 2007 |Earnings per share 87. 63 61. 68 38. 08 |Dividend per share 0. 44 0. 26 0. 11 |Cash Per Share 0. 3 0 0. 23 JBH’s capacity to deliver growth presents an attractive offering for an investor displaying exceptional results over the assessed period with a 56. 32% increase in earnings per share. JBH’s growth is expected to continue into the future with 18 new stores expected to open within the 09/10 fiscal year. JBH are currently securing 15 sites per year and estimate that this growth can continue until they reach at least 160 stores. JBH share prices from July 2007 – July 2009. Source: (CommSec, www. commsec. com. au) Forecast & Risk Analysis 007 2008 2009 2010e 2011e 2012e | |Growth (%) – 57. 69% 40. 91% 33. 33% 17. 5% 17. 53% |Average Growth (%) 33. 33% | |Beta 1. 15 1. 28 | | | | |

JBH has displayed strong growth percentage increases throughout the entire assessed period and even though future forecasts are lower they still present a positive sign for investment opportunities. Dividend growth for the assessed 2007/2009 periods totaled a 75% increase; further, analysts’ expectations for an average future growth sit at 17. 51%. Comsec are currently recommending a “strong buy” (1 analyst), “moderate buy” (2 analysts), and “hold” (2 analysts), further confirming the quality of the JBH share offering and future potential growth prospects.

The risk free premium is 6% and the risk free rate is 6%, identifying that this is the minimum expected return at zero risk. A beta-coefficient of 1. 15 indicates that the investment will be 15% more volatile than the share market. Based on an expected return of 8%, the CAPM indicates that the required return on JBH shares is 8. 3%. With a current growth average of 49. 30% between the 2008-2009 period and a future forecast average for 2010-2012 of 22. 7%, it is clear that the returns on JBH shares warrant the investment. (Austock Equities Research – December Quarter 2009)

Conclusion and Recommendation In assessing JBH from an investment perspective, the company’s future looks strong and presents a low risk option to investors. Its ability to perform through challenging economic periods in the past has seen it become a leader within its category. Its financial statements exhibit positive current and future performance, which is re-assuring for shareholders and investors alike. With JBH focused on expansion in 2010 with 18 stores in the pipeline ready to contribute to shareholder wealth, they present as an excellent option for investors.

Their business model is solid and have proven that they are capable of delivering profits and growth through previous tough economic conditions. As this investment advice is geared toward a long-term investment strategy, there is no hesitation in recommending JBH as an option relative to the other retailer share options available. With strong financial statements and positive future performance forecasts it is recommended that JBH shares be acquired. References (2008) JBH Annual Report (2009) JBH Annual Report (Austock Equities Research – December Quarter 2009)

Stocks to watch, May 10, 2010, http://www. watoday. com. au/business/markets/stocks-to-watch-20100510-um2x. html Symons, D. (April 13, 2010) Fading fiscal stimulus could put JB out of tune. http://www. watoday. com. au/business/fading-fiscal-stimulus-could-put-jb-out-of-tune-20100412-s43g. html Thomson, J (09 February 2010) The 10 strategy secrets of JB Hi-Fi, http://www. smartcompany. com. au/retail/20100209-the-10-strategy-secrets-of-jb-hi-fi-chief-richard-uechtritz-here-s-what-you-can-learn. html Bibliography Gitman, Juchau & Flanagan, Principles of Managerial Finance,5th edition, 2008, Australia

Birt, Chalmers, Beal, Brooks, Byrne & Oliver, Accounting Business Reporting for Decision Making 2nd edition, 2008, Australia. nd market performance, before conducting a forecast and risk analysis. Annual reports from the past three years and analysts published views were used as the basis for the final recommendation. These evaluations will show JB Hi-Fi to be a strong investment opportunity. Table of Contents IntroductionPage 1 JB Hi-Fi Company ProfilePage 2 Financial AnalysisPage 3 • Profitability AnalysisPage 3 • Asset Efficiency AnalysisPage 5 • Liquidity AnalysisPage 6 • Capital Structure AnalysisPage 7 Market Performance AnalysisPage 8 • Forecast & Risk AnalysisPage 9 Conclusion And RecommendationsPage 10 ReferencesPage 11 Introduction This report will deal exclusively with the assessment and evaluation of JB Hi-Fi (JBH) as an investment. It is part of a group of reports compiled to evaluate a list of possible investment opportunities in the discretionary consumer retail industry. The other companies that are evaluated in this group include: David Jones, Harvey Norman, The Reject Shop and Clive Peters. Each of these companies are listed on the ASX and retails to its own distinctive target market.

The decision to invest in one of these companies does not exclude the decision to also invest in one or more of the other companies. The report seeks to evaluate and analyze each of these companies from a financial, risk and investment point of view. The analysis will seek to determine which companies are acceptable as an investment in terms of its: 1. Finances (Sound profitability, efficiency, liquidity, and capital structure), 2. Value (Acceptable costs and returns relative to the market and peers) and, 3. Risks (Organisational stability and future growth prospects) The investment period is 20 Years.

JB Hi-Fi (JBH) Company Profile JB Hi-Fi Limited (JBH) is a specialty discount retailer of branded home entertainment products. The Group’s products fall in into consumer electronics, car sound systems, music, DVDs and white goods. JBH does not operate a warehouse; instead all stock is delivered directly to each retail outlet and largely stored on the shop floor. JBH uses its size and mix of high growth categories to increase its buying and advertising synergies. They are focused on growth, opening 39 stores in the past 2 years and a securing another 18 sites set to open in the 2009/2010 fiscal year.

As of the 30th of June 2009, the company had 123 stores operating around Australia and New Zealand. (106 branded JB Hi-Fi) JBH delivered another record result in 2009 with sales up 27. 3%on the prior year, EBIT growth of 39% and NPAT growth of 45% at year-end. This was achieved through a combination of strong comparative store sales growth and a continued expansion of its product offering. JB Hi-Fi presents itself as a company that is profitable, highly efficient in relation to operational performance, liquid relative to its business model and capable of company and shareholder growth.

Profitability Analysis | | |2009 |2008 |2007 | |Return on equity |41. 19% |39. 71% |35. 71% | |Return on assets |15. 12% |13. 36% |10. 17% | |Gross profit margin |21. 63% |21. 86% |22. 11% | |Profit margin | |5. 46% |4. 63% |4. 05% |

JBH have a strong net income return relative to the percentage of shareholders invested equity, displaying a 13. 3% growth over the assessed period. This optimistic growth pattern presents itself to be highly favorable to investors. JBH further add to their capacity to profit displaying a 32. 74% increase in its ability to generate income from its asset investments. The fact that both the ROE and ROA display growth indicates positive operational performance. Gross profit margins are stable with only slight fluctuations over the assessed period indicating a confident business model and pricing structure.

An increase of 25. 82% of cash flow generated by each sales revenue dollar further confirms JBH’s capacity to be profitable. Despite the positive profits and growth that JBH present over this assessed period, caution needs to be advised for future performance expectations. Analysts are predicting tough times may be ahead for retailers as the impact from the financial stimulus fades, and uncertainty surrounding the condition of the Australian economy. Analyst’s further voice concerns that as interest rates continue to rise in 2010 that there will be less disposable income for families and spending habits will tighten. Symons, 2010) Richard Uechtritz, JB Hi-Fi’s CEO provides confidence by stating that JBH’s strong performance history provides investor confidence in their business. The company continued to grow through the recession of the 1990’s and has continued to do so since the onset of the global financial crisis. The performance of the company during these periods highlights the strength of its business model. (JBH Annual Report, 2009) Asset Efficiency Analysis | |2009 |2008 |2007 | |Asset turnover ratio |3. 17 |3. 412 |2. 827 | |Days inventory |50. 9 |54. 27 |60. 17 | |Days receivables |2. 67 |2. 73 |3. 89 | |Days payable | |42. 97 |39. 3 |52. 76 | |Times Inventory Turnover | |5. 6196 |5. 2556 |4. 7279 | JBH’s ability to generate income per dollar from its assets has increased by 19. 2% over the reviewed period, reflecting a positive improving result. JBH do not have a distribution warehouse, instead the company holds all stock, in store, displayed on the floor. This approach makes for a lean system, which eliminates over ordering. JBH’s asset efficiency ratios indicate that they are efficient in selling as well as collecting money from sales. The figures further indicate that it is getting better at refinement. A reduction of 15. 41% in the time taken to sell inventory and a 31. 36% increase in receiving income from inventory sales.

These figures further re-enforce JBH’s focus on refining waste and improving operations. JBH’s capacity to generate income from inventory is positive allowing the company to pay its debtors promptly. Throughout the assessed period they have recorded a reduction in the time taken to pay debtors of 18. 56% and averaging a 45-day payment period. JBH’s pursuit to identify, eliminate waste and to improve productivity has resulted in a reduction in CODB of 1. 5% and at current levels believe that it is the most productive model of any of the listed retailers. JBH Annual Report, 2009) Liquidity Analysis | |2009 |2008 |2007 | |Quick Ratio | |0. 31 |0. 24 |0. 34 | |Current Ratio | |1. 32 |1. 35 |1. 35 | |Cash Flow Ratio |0. 4497 |0. 1779 |0. 3058 | JBH’s Liquidity analysis is indicative of its highly refined business model.

JBH have the capacity to meet all short-term obligations with inventory held without over investing in working capital. JBH’s ability to efficiently cycle inventory supports their system. Further reassurance is provided with their capacity to pay due debt as expressed in the previous analysis. JBH’s balance sheet indicates that there has been a 32. 86% increase in inventory purchased by the company, this being its most predominant investment relative to reported total assets. Although JBH experienced a reduction of 41% in its cash flows in the 2007-2008 period, it has been quick to rectify it with substantial growth in 2009 up 60. 4% from 2008, a very strong result. Despite JBH’s aggressive expansion over the assessed period, they have managed to keep a very strong balance sheet. Gearing has been kept low and working capital has remained strong thanks to good stock and inventory management. (Thomson, 2010) Capital Structure Analysis | |2009 |2008 |2007 | |Debt to equity ratio |188. 61% |226. 95% |281. 64% | |Debt ratio | |65. 5% |69. 41% |73. 80% | |Equity ratio | |34. 65% |30. 59% |26. 20% | |Interest coverage ratio |7. 82 |49. 27 |32. 78 | |Debt coverage ratio |0. 7465 |3. 144 |1. 9554 | | | | | | | |JBH |Sector |All Ords. |Interest cover |17. 67 |10. 32 |4 | The Capital structure analysis shows that JBH choose to fund their investments with debt rather than equity. This is advantageous as debt is cheaper than equity funding. Interest and cash debt coverage ratios position JBH in an exceptional position, detailing that if necessary the company would be able to pay off all non-current liabilities with net cash flows from operating activities in under a year. This has been made possible by strong performance particularly within the 2008 – 2009 period.

Interest cover sits at 17. 67 which is positive relative to its competitors at 10. 32 and the All Ords of 4. This data indicates that JBH is in a strong position to pay its debts again presenting a positive sign as an investment opportunity. Market Performance Analysis | |2009 |2008 |2007 | |Earnings per share |87. 63 |61. 68 |38. 08 | |Dividend per share |0. 44 |0. 6 |0. 11 | |Cash Per Share |0. 33 |0 |0. 23 | JBH’s capacity to deliver growth presents an attractive offering for an investor displaying exceptional results over the assessed period with a 56. 32% increase in earnings per share. JBH’s growth is expected to continue into the future with 18 new stores expected to open within the 09/10 fiscal year. JBH are currently securing 15 sites per year and estimate that this growth can continue until they reach at least 160 stores. pic] JBH share prices from July 2007 – July 2009. Source: (CommSec, www. commsec. com. au) Forecast & Risk Analysis | |200|2008 |2009 |2010e |2011e |2012e | | | |7 | | | | | | | |Growth (%) | |- |57. 69% |40. 91% |33. 33% |17. 5% |17. 53% | |Average Growth (%) |33. 3% | | | | | | | | | | | | | | | |Beta | |1. 15 |1. 28 | | | | | JBH has displayed strong growth percentage increases throughout the entire assessed period and even though future forecasts are lower they still present a positive sign for investment opportunities.

Dividend growth for the assessed 2007/2009 periods totaled a 75% increase; further, analysts’ expectations for an average future growth sit at 17. 51%. Comsec are currently recommending a “strong buy” (1 analyst), “moderate buy” (2 analysts), and “hold” (2 analysts), further confirming the quality of the JBH share offering and future potential growth prospects. [pic] http://comsec. com. au The risk free premium is 6% and the risk free rate is 6%, identifying that this is the minimum expected return at zero risk. A beta-coefficient of 1. 5 indicates that the investment will be 15% more volatile than the share market. Based on an expected return of 8%, the CAPM indicates that the required return on JBH shares is 8. 3%. With a current growth average of 49. 30% between the 2008-2009 period and a future forecast average for 2010-2012 of 22. 7%, it is clear that the returns on JBH shares warrant the investment. (Austock Equities Research – December Quarter 2009) Conclusion and Recommendation In assessing JBH from an investment perspective, the company’s future looks strong and presents a low risk option to investors.

Its ability to perform through challenging economic periods in the past has seen it become a leader within its category. Its financial statements exhibit positive current and future performance, which is re-assuring for shareholders and investors alike. With JBH focused on expansion in 2010 with 18 stores in the pipeline ready to contribute to shareholder wealth, they present as an excellent option for investors. Their business model is solid and have proven that they are capable of delivering profits and growth through previous tough economic conditions.

As this investment advice is geared toward a long-term investment strategy, there is no hesitation in recommending JBH as an option relative to the other retailer share options available. With strong financial statements and positive future performance forecasts it is recommended that JBH shares be acquired. References (2008) JBH Annual Report (2009) JBH Annual Report (Austock Equities Research – December Quarter 2009) Stocks to watch, May 10, 2010, http://www. watoday. com. au/business/markets/stocks-to-watch-20100510-um2x. html Symons, D. April 13, 2010) Fading fiscal stimulus could put JB out of tune. http://www. watoday. com. au/business/fading-fiscal-stimulus-could-put-jb-out-of-tune-20100412-s43g. html Thomson, J (09 February 2010) The 10 strategy secrets of JB Hi-Fi, http://www. smartcompany. com. au/retail/20100209-the-10-strategy-secrets-of-jb-hi-fi-chief-richard-uechtritz-here-s-what-you-can-learn. html Bibliography Gitman, Juchau & Flanagan, Principles of Managerial Finance,5th edition, 2008, Australia Birt, Chalmers, Beal, Brooks, Byrne & Oliver, Accounting Business Reporting for Decision Making 2nd edition, 2008, Australia.