About: JB Hi-Fi is an Australian and New Zealand retailer of consumer goods, specialising in electronics/hardware, video games, DVDs, CDs, and home appliances. In September 2016 JBH acquired appliance retailer The Good Guys, thereby edging Harvey Norman as the largest consumer electronics and appliances retailer in the country. JB Hi-Fi's other competitors include Myer, David Jones, Target and Big W.

Why it’s in the portfolio: JBH provides the portfolio with exposure to one of the largest retailers in the country that has grown steadily in the last few years despite the advent of online shopping. The collapse of its competitor Dick Smith in 2016 has certainly contributed to recent growth and created a more favourable competitive landscape. JBH appears to be attractively priced.

Fundamentals: JBH currently trades on a price-to-earnings ratio of around 12x forward earnings, which is considered cheap in the current market environment, and a price-to-book ratio of around 3x. JBH currently offers around a 7% gross dividend yield, and a dividend payout ratio of around 64%. At 23%, JBH’s level of debt relative to assets is considered to be between low and mid-range. It has doubled recently due to the acquisition of The Good Guys (which was paid partially with debt and partially with an equity raise)

What could go wrong? JBH has grown by successfully rolling out new stores around the country and may be closer to reaching the physical limitations of this strategy. It isn’t yet clear that The Good Guys acquisition will be successful. Furthermore, JBH’s future could be endangered by the growth of online shopping and by the arrival of larger and more operationally efficient foreign retailers, such as Amazon. In the last few years JBH has also benefitted from rising house prices, which have led to more new units being built and therefore greater demand for appliances and electronic goods. A downturn or even a stabilisation of house prices could therefore reduce demand for these same goods.