Retail downgrade

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JB Hi-Fi (Code: JBH), arguably the best retailer in the country, yesterday announced a 5% downgrade of earnings before interest and tax, even on the back of opening new stores, as price deflation of its core goods continued amidst stagnant spending patterns. The downgrade was announced after the close and as a result, the share price was smashed some 13% this morning, after Deutsche Bank and UBS both downgraded JBH from “buy” to “neutral”. JBH trailing price/earnings ratio has slumped to just over 11 times, just over half its 10 year average, on investor expectations that its growth story appears over.

The pummeling extended to other battered down retail stocks, with Myer (MYR) down almost 5%, Harvey Norman (HVN) down 5.2% and David Jones (DJS) off 4%, on expectations that the weaker and less profitable retailers may also suffer downgrades in profits. Woolworths (WOW) which owns JBH competitor Dick Smith Electronics is actually up this morning, bucking the trend.

The woes in the retailing sector continue, shown clearly by the daily chart since the March to December 2009 rally and subsequent deflation:

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Deutsche Bank contends that Harvey Norman may be the next retailer to announce a downgrade, as its electrical business also suffers from high deflation and low overall profitability. The other major retailers are also facing stark Christmas’ and 2012 trading conditions.

All in all, a surprising move by JBH to warn of a profit decline some 10 days before Christmas, and so much for the campaign of “everything is fine in retail”.

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