Dick Smith rivals will prosper after a quick hit on clearance sales

JB Hi-Fi and Harvey Norman will first have to weather a flood of cheap electronics onto the market but will eventually prosper from the demise of rival Dick Smith.

That's the view of analysts and fund managers who expect the further rationalisation in the sector to boost sales and profit for the two market leaders.

The focus on rebates that contributed to the demise of Dick Smith Holdings started under its former private equity ...
The focus on rebates that contributed to the demise of Dick Smith Holdings started under its former private equity owners, Anchorage Capital Partners, insiders have claimed. Photo: Glenn Hunt

The prospect of one less competitor in the electronics retail market already has investors salivating. JB Hi-Fi shares were up 3 per cent to $21.18 at midday on Wednesday.

JB Hi-Fi shares have now completely recovered after stumbling in December when Dick Smith abandoned its profit guidance and launched a desperate clearance sale in a failed attempt to cover its debts. The stock is up 34 per cent in the past 12 months.

Harvey Norman shares were unmoved by the drama, trading flat at $4.31 at midday, although they have gained 28 per cent in the past year.

The industry was flooded with discounted stock in 2012 after the collapse of WOW Sight and Sound and the closure of 70 Dick Smith stores by Woolworths, before the chain was sold to private equity. 

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Morgan Stanley analyst Thomas Kierath​ told clients that greater clearance activity by Dick Smith would affect JB Hi-Fi and Harvey Norman but this would be outweighed by their ability to snare extra sales of about $200 million annually each.

Based on sales in 2014-15, Dick Smith is the fourth largest electronics retailer in Australia behind JB Hi-Fi, Harvey Norman and The Good Guys, Mr Kierath wrote in a research note. 

"If we assume that the [approximately] $1.1 billion of Dick Smith sales shifts in line with existing industry market shares, JB Hi-Fi and Harvey Norman should pick up [about] $200 million in annual sales each," he said.

This could deliver an extra $20 million in profit to each retailer, which would boost Morgan Stanley's earnings before interest and tax forecasts in 2016-17 by 9 per cent for JB Hi-Fi and 4 per cent for Harvey Norman, he added.

Extra benefit may come from the creation of a stronger duopoly that allows the two consumer electronics giants to bargain harder.

"Assuming a 50 basis point improvement in JB Hi-Fi's gross margins equates to another $20 million of profit, so collectively one could assume longer-term profitability improves by as much as 20 per cent."

CLSA analyst David Thomas said potential Dick Smith store closures would be positive for both major competitors, but on the basis of existing store locations he sees JB Hi-Fi as the biggest beneficiary. "Its offering most closely matches Dick Smith in terms of store locations and category mix," he wrote in a note.

However APP Securities private wealth adviser Matthew Felsman​ tried to temper the enthusiasm, saying JB Hi-Fi remained the most-shorted stock of the top 200, suggesting some punters expected the share price growth to be short-lived. "Recent gains in JB Hi-Fi are more realistically a continuation of year-end driven moves such as position squaring and short covering," he said.

Apple's woes, including reports of reduced demand for iPhones, could also affect JB Hi-Fi, he said. "With only modest results in new products such as the Apple Watch and refreshed Apple TV the iPhone drives Apple's business and is no doubt a large part of JB Hi-Fi sales," Mr Felsman said.

Forager Funds Management chief investment officer Steve Johnson​ told ABC radio he expected a similar liquidation to take place but agreed the hit would be short-term only.

However he warned the threat of online competition from new players would not subside for the established retailers.

"It's still hyper-competitive out there in electronics and I think increasingly people are shifting their purchases in this space to the internet," he said.