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COMMENT: Why an IPO Is A Real Risk For The Good Guys

JB Hi-Fi’s annual results, should be read and re-read by anyone considering an investment in The Good Guys.

What these results reveal is two key factors, the company is a well-oiled machine that is run by a management team that is among the best there is out there. At the same time the JB Hi Fi board have made it abundantly clear that they have a white hot desire to grow their appliance business and they will do it, with or without The Good Guys.

The Good Guys would obviously present an opportunity to dramatically and instantly expand JB’s presence It would add about $2bn a year of sales and $110m of earnings before interest, tax, depreciation and amortisation.

The big advantage that JB Hi Fi has is that they are getting stronger and as they invest in new stores they are opening bigger stores to cater for the sale of appliances and this is a real threat to The Good Guys.

And as JB Hi Fi grows their business into the appliance arena vendor’s are going to have to cut them the same margin deals as they do for The Good Guys and Harvey Norman.

Right now JB Hi Fi is disadvantaged in that they do not have the scale to get the same trading deals as The Good Guys in the appliance market and this has been well and truly noted by the JB Hi Fi board who decided to go after The Good Guys as a way to correct their trading imbalance.

This is despite the fact that JB Hi Fi buy the bulk of their appliances via the NARTA, buying group, who could also come under pressure should JB Hi Fi be successful in the acquisition of The Good Guys.

JB Hi Fi is a company who are extremely prudent and they are already proving that they do not need The Good Guys to grow, they are also loyal to vendors who support them in their pursuit of growth.

The board recently sent out a clear message in that they will only consider a purchase of The Good Guys if it made “compelling financial sense” for shareholders.

Currently several appliance vendors are happy with the fact that Harvey Norman and The Good Guys control over 55% of the Australian appliance market. By only supplying these two retailers they have been able to control their costs while delivering higher margins, in reality they do not want additional competition to muddy their cosy relationships with these two big appliance retailers.

Several appliance brands have so far refused to supply JB Hi Fi with their best selling products and when they have chosen to supply the mass retailer they have only given them selected access to their appliance range.

Should the Muir family decide to go to an IPO as opposed to selling to JB Hi Fi there is the real possibility that the hundred store retail chain will face tougher competition from both Harvey Norman and JB HI FI.

While The Good Guys would be “nice-to-have” and would dramatically accelerate and deepen JB Hi-Fi’s already-rapid expansion into home appliances, it doesn’t actually need The Good Guys to maintain its sales and earnings growth.413b76f56efbd68ee473be7b847eb902

Above: Richard Murray, CEO JB Hi-Fi’

Recently The Good Guys did the rounds of potential investors, their management team who favour an IPO are currently forecasting 20% growth a number which is already being questioned by several potential investors.

One analyst recently told me that there is “a real risk” that The Good Guys will struggle to grow their business. They said “The Good Guys have 100 stores and for them to grow their business, they are going to have too rapidly expand the retail network while at the same time working out how to compete with JB Hi Fi who have a white hot desire to grow their share of the Australian appliance market from 3% to 10% within the next 18 months”.

“This share will not be organic it will be stripped from other retailers especially The Good Guys who internally will be facing significant change while at the same time having to compete with competitive forces trying to take business away from them”.

Yesterday JB Hi Fi management forecast sales of about $4.25 billion in the current financial year, which would represent an increase of about 7.5 per cent on the $3.95bn of turnover in 2015-16. It is already off to an excellent start, July sales were up 13.4 per cent, with comparable stores sales growth of 9.5 per cent.

The focus on The Good Guys has intensified after the Australian Competition and Consumer Commission announced last week that it wouldn’t oppose a JB acquisition and while this is good news for JB Hi Fi it is meaningless unless they make a bid.

On the other hand, investors are going to be wary of the Dick Smith collapse which saw the company placed into liquidation with debts of over $500 million only two years after they floated.

According to Citi equities JB Hi Fi should pay no more than $900M, analysts are tipping that the Muir family could get over $1 billion via an IPO however for the investors in this IPO the real question is whether they have the skill set and the retail knowledge to compete head-on against a soaring JB Hi Fi on a wily old dog called Gerry Harvey.

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