Despite inflation and a pandemic, JB Hi-Fi records smashing profits. How come?

Amid a storm of outrage over companies profiteering throughout Australia’s inflation crisis, JB Hi-Fi released its earnings results yesterday. In the last six months of 2022, the big electronics retailer did very nicely indeed.

Regular, scheduled corporate results are part of the deal of being a public company listed on the sharemarket. It comes with an upside and a downside. When a public company is failing to make money, that fact is thrust into the spotlight. But when a company is making lots of money, that is exposed too. Usually that’s good. But sometimes management would rather downplay big profits.

“There was that little bit of less discounting on the floor when stock was still a little bit tight,” CEO Terry Smart told investors this week.

JB Hi-Fi had a very good pandemic as people made themselves a home office. Since then, things have been going even better. The company, whose tagline used to be “JB Hi-Fi is smashing prices”, found itself raising prices in 2022, and that helped bring home the bacon.

Profits were up and gross margin was the highest it had been in years.

You can tell how a business is increasing profit by looking at the numbers. Imagine it is selling twice as many computers — sales will be up by 100%. If it is maintaining margin on those computers, profit will be up by 100% too. But if it doubled sales by putting those computers on special, sales will be up by 100% and profits up by less than 100% — perhaps 50%.

JB Hi-Fi’s situation is that sales are up 9%, but profits are up 14%. That suggests it could have been raising prices: some young employee with blue hair, skinny jeans and an overloaded lanyard is going around the store, taking down the old handwritten yellow price tags and putting up ones with a bigger number on them. In theory it could also be explained by consumers moving to buy more things that are already high-margin.

Is JB ripping us off?

When inflation hits, we can imagine two kinds of companies: one finds its input costs rising, its margins getting squeezed, unable to make enough to pay the rent and forced to raise prices just to stay alive. The other one is its competitor. It notices input prices rising too, reducing profits, but not so much that it can’t make any. Then it notices its competitor lift prices. It realises it can lift prices too, and if it does it right, it can maintain lower prices than the competitor while actually lifting profits. 

In truth, most industries will have a spectrum, with some companies sent broke by inflation while others make extra profit. What distinguishes them is the quality of management. And JB Hi-Fi is a textbook case of good management.

In 2002, who would have imagined a CD retailer would go on to become one of Australia’s most successful businesses? There’s a lot it does differently from other retailers. For example, it’s well and truly big enough to afford a printer for its price tags — it doesn’t need to get a kid to do it with a texta. But there’s obviously an advantage in leaving that approach in place. Perhaps starting out in a dying industry gave JB Hi-Fi the impetus to become what it has become: it learnt that to survive you have to change — and have strong management.

So it’s no surprise to see it making more profit amid inflation. It’s the company you’d expect to do so. And its success isn’t necessarily a sign that every company in Australia is in the same situation.

What’s more, JB is suggesting the good times are ceasing to roll. Its latest sales growth, for January, is down to 2.5% compared with the year before. That’s less than inflation, suggesting a reduction in sales volume. And when that happens, the give and take will reverse.

“We will see some of that elevated margins start to return … to historical levels,” said Smart. “We do expect we will give some of that back.”