a very healthy 5.2 per cent. Net earnings after tax were up 7.5 per cent to $95.2 million as the chain cemented its category killer status and continued to develop its online platform and to expand its JB Hi Fi Home concept. While JB Hi-Fi celebrated Christmas with strong sales, the rival Dick Smith chain limped towards administration, weighed down by debt, a slew of lossmaking and underperforming stores and a poorly balanced merchandise mix. Ferrier Hodgson, the administrators appointed by a banking syndicate to Dick Smith Holdings, are understood to be negotiating with at least one potential overseas buyer, which is arguably the only justification for not having moved to close stores given the chain is reportedly losing around $3 million a week. In most administrations, unprofitable stores would be closed quickly to staunch the bleeding. The fact Ferrier Hodgson has not started to quit unprofitable outlets suggests that an overseas buyer may be focusing more on the optimum store network for entry into the Australian market, rather than individual store metrics. The diversified Indian conglomerate, Tata Group, reportedly expressed interest in the beleaguered Dick Smith chain when it was placed in the hands of receivers and then administrators in early January. There is also speculation of Chinese interest and possibly interest from a private equity firm, presumably an entity with more patience than Anchorage Capital Partners, which has been accused as setting Dick Smith up to fail as a public company with its brazen share market float and expansion plans that were heavily funded by debt. JB Hi-Fi has ruled out any interest in cherry-picking Dick Smith stores in the event Ferrier Hodgson can’t strike a deal for the sale of most if not all of the beleaguered chain. Richard Murray, JB Hi-Fi CEO, said most of the Dick Smith stores were too small for his chain’s formats, particularly with the continuing development of the JB Hi-Fi Home format that includes whitegoods and electrical appliances. Most Dick Smith stores are also located in shopping centres or precincts that already have JB Hi-Fi stores. The average JB Hi-Fi store generates around $20 million per year compared with about $3 million for the average Dick Smith store, reflecting the smaller store formats, lower customer traffic and less compelling merchandise range of the Dick Smith outlets. The evolution of JB Hi-Fi JB Hi-Fi started in 1974 in Melbourne’s suburbs with stores in strip centre locations that aimed to sell a specialist range of Hi-Fi and recorded music at Australia’s lowest prices. The chain had 13 stores when it was acquired by a private equity arm of Macquarie Bank and floated on the Australian Stock Exchange in 2003 as one of, if not the, most successful retail float by a private equity and senior management ownership model. The company has grown to 194 stores, almost entirely through organic growth rather than acquisitions, the notable exceptions being the Clive Anthony chain in Queensland and the Hill and Stewart chain in New Zealand. JB Hi-Fi has continually evolved, riding successful product releases in entertainment and computers while maintaining its focus on competitive pricing, dynamic, busy store environments and customer service levels that are much better than most retailers. JB Hi-Fi has also developed positive relationships with suppliers and has been careful to keep a balance in private label ranges. Staff in JB Hi-Fi have good product knowledge and don’t send customers away if a product is not in stock. They will contact other stores for a product transfer or order the product in and notify the customer when it arrives. They actually seem to like working in JB Hi-Fi stores and, more importantly, actually seem to like customers! JB Hi-Fi has outclassed rivals in the home entertainment category, forcing Myer and David Jones to outsource their music and DVD departments, and skittling retailers like Clive Peters, Brashs, Megamart, WOW Sight & Sound, Retravision, Betta Electrical and independent hi-fi stores. The 2016 half-year result was bolstered by strong trading in November and December, according to Murray. Strong trading for JB Hi-Fi in those months, which is also expected to be reflected in the forthcoming results of Harvey Norman, contrasts with poor sales for Dick Smith which resorted to deep discounting in the lead up to Christmas in a desperate bid to generate cash flow to stave off an inevitable collapse. With January sales at JB Hi-Fi running at a 10.2 per cent increase and like for like store sales up 6.5 per cent, the retailer is on track to record a strong result for the full financial year of around $3.9 billion with net earnings between $143 million and $147 million. Sales could well better those projections from Murray if Ferrier Hodgson cannot conclude a sale of the Dick Smith chain and are forced to close and liquidate the business. Around $300 million in sales would be up for grabs if Dick Smith exits the market completely. Dick Smith rises? Less likely, but still feasible, is a more aggressive Dick Smith under new owners that could retain the existing market share and look to build its customer base. Realistically, a new owner for Dick Smith would be unlikely to impact on JB Hi-Fi in the current financial year and possibly not into the 2017 financial year as it will take time to restructure the business and win back consumer confidence after the refusal of administrators to accept gift cards sold right up until the chain was placed in administration. Some analysts suggest the Dick Smith brand is so badly damaged that a name change could be necessary along with a merciful culling of under-performing stores. In terms of sales and market share opportunities, JB Hi-Fi might also benefit from changing strategies at David Jones, which had licensed out its electrical department to Dick Smith, which operated on a store within a store basis. The license agreement ended in January and David Jones is now keen to expand into food, a move that could have implications for the electrical category. In any event, Murray and his management team are focused on their own business rather than what others are doing and they are continuing to open new stores and revamp existing stores to the JB Hi-Fi Home format. The retailer expects to open eight new stores in the current financial year with a store development program that has a target of 20 more stores across Australia and New Zealand in the immediate future. The program would also increase the number of JB Hi-Fi Home stores from 56 currently to at least 75 and is continuing to rollout small appliances into the conventional store format. Murray claims appliances are a natural adjacency to the retailer’s successful consumer electronics categories and represents a significant growth opportunity with the appliance market valued at $4.6 billion. JB Hi-Fi is also continuing to develop its online sales platform, which currently generates around three per cent of total sales, representing $62.8 million in the latest half year. Visits to the retailer’s websites are averaging 1.3 million a week, driving online sales growth of 28.9 per cent in the first half of FY2016. Murray expects online platforms to deliver a long-term aspirational sales target of around $500 million a year through both organic growth and strategic acquisitions. Murray said the online platforms are a key driver for future growth and the retailer is pursuing an aggressive recruitment plan to expand its product and service offer. JB Hi-Fi continues to focus on containing operational costs, pegging the cost of doing business at 14.2 per cent in the comparable half-years for FY2015 and FY2016 and has maintained gross margins at 21.7 per cent in the same two periods. Reflecting the move into whitegoods and appliances, sales category splits for JB Hi-Fi have changed significantly since FY2012. In the latest half, the retailer’s sales of hardware and services accounted for 84 per cent of total revenues, while software sales were 16 per cent. In the comparable half in FY2012, JB Hi-Fi’s hardware and services sales were 74.6 per cent and software sales were 25.4 per cent. Want more Inside Retail? Subscribe to Inside Retail Weekly now and get our premium print publication delivered to your door every week.