Can retail giants JB-HI-FI and Harvey Norman survive the bear attack?

Even before the pandemic the retail industry was suffering from a recessionary decline. Physical stores were not catering to the changes in our shopping behaviour and the internet continued to make life difficult for your local Video Ezy – if you even had one.

However, the coronavirus could be the final blow that causes some retail stores to never open their doors again. Australia’s draconian lock down measures are causing major retailers such as Myer (ASX: MYR), Cotton On and Kathmandu to close their doors to the public. Consequently, the retail stores who are lacking in the online area are likely to be infected by the coronavirus.

Moreover, when we are told to ‘stay at home’ and only venture out if we need to exercise, go to work, get medical care or buy necessities people are not entertaining the idea of getting the latest clothes, technology or dinner plate set. Thus, with low foot traffic, little to no discretionary income and with a virus-orientated stimulus package retail shares are likely to be battered with even more weak sales.

However, it is not all doom and gloom for every ASX retail share as Harvey Norman (ASX: HVN) and JB-HI-FI (JBH: ASX) appear to come out on top.


Why is JBH surging ?

JB’s impressive H1 2020 financials, strong diversification of products, and dividend increase pre-coronavirus captivated the eyes of ASX investors.

The strong 2019/20 momentum behind JBH appears to be alive and well. Especially with Macquarie Bank (BUY), Morningstar (Undervalued), and Consensus (Moderate Buy), all rallying behind the retail giant. Thus, explaining the 25% surge over the past week

Unlike the other retail stores, for JB-HI-Fi, it is business as usual throughout the pandemic. Primarily, because the retail giant provides customers with the essential products they need, to respond to and prepare for COVID-19. Such as computers, monitors, and keyboards to aid remote learning as well as the essential home appliances for food storage and preparation (The Good Guys).

Thus it comes as no surprise that JB’s sales between 1st January and the 22nd March are soaring.

  • Good guys up 10.4%
  • JB-HI-FI Australia up 9.1%
  • JB-HI-FI New Zealand down -2.0%

JB is currently trading at $30.99, which is a 30% discount from its $44 high back in early February. The discount, coupled with the above commentary, makes JBH an attractive investment for some.

Personally, I would wait for another dip before entering, ideally pre-March or June financials. Because the current price is off the back of a bullish week, and the market volatility remains high. Resulting in JB withdrawing its FY20 earnings guidance. Nonetheless, JB holds significant long term potential.

On the other hand, JB is not immune to the coronavirus. Especially, as JB had to close 14 stores in New Zealand to adhere to the country’s level 4 restrictions. JB-HI-FI New Zealand only accounts for 3% of JB’s total sales. Meaning the short term decline in sales should be immaterial.


Why is HVN set to emerge as a market leader post-coronavirus?

Just like JB, Harvey Norman’s 2019 dividend yield and growing diversified product range saw investors lock onto the retail behemoth like a satellite.

Harvey Norman Holdings Pty Ltd consists of the following business:

  1. Harvey Norman – Household goods, Information technology (computers, mobile phones etc.), bedding and many more
  2. Home renovations
  3. Domayne – Sells furniture, computers, electrical and flooring
  4. Joyce Mayne – Whitegoods, Stationary, and IT products
  5. OFIS (Stationary)

With the world shifting from an office to a home environment Harvey Norman will likely experience significant growth in sales. Thus, the diversified giant Harvey Norman, is becoming a possible investment for now and for the future. Also, Macquarie Bank included HVN in their 2020 best buys for the “Inevitable recovery,” and Morningstar rated the retail conglomerate as undervalued.

Moreover, as Australians bunker down during the coronavirus we could see those stimulus package cheques get cashed in for a Harvey Norman TV.

Without a doubt, the ASX Bear is beating up Harvey Norman, as they currently trade at $2.97, a 38% discount. HVN will likely experience even more short-term  losses as stores in Slovenia, Malaysia and Croatia were closed for March.

Despite the uncertainty, CEO Gerry Harvey successfully navigated Harvey Norman through the unkind waters of the 1987 crash, the GFC, and the SARS outbreak. Providing investors with an extra layer of confidence that Harvey Norman will come out the other side.

Yes, there is risk in both companies. However, essentially, what I am saying is that JBH and HVN are holding a full house in the ASX casino while other companies like Myer (ASX:MYR), the Reject Shop (ASX: TRS) and Jeanswest have a pair of 7’s. Meaning the likelihood that JB and Harvey Norman come out as market leaders after the coronavirus is high. Your research is also required.

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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Senior manager of YIG.

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