Yesterday it was the turn of Citigroup analysts to throw a bomb at the retail sector which sparked some panicky media reaction, but not much share price movement (compared with Myer’s plunge on Monday).
Citi cut its earnings forecast for JB Hi-Fi (JBH) and Harvey Norman (HVN) after analysing the impact of Amazon’s market entry in the US, UK and Germany.
It also moved JB Hi-Fi to a sell and cut its long term earnings guidance by more than 40%. Citi also cut its forecasts for Harvey Norman by more than 30% and retained its sell rating on the retailer.
“Our proprietary survey indicates Amazon is 15 per cent cheaper than Australian retailers across three major categories,” Citi claimed in its research report.
"In our view, average selling prices need to contract by about 10 per cent to narrow this gap to about 5 per cent. This will likely drive 7 per cent to 11 per cent declines in sales productivity and about 180 basis points to 250 basis points declines in EBIT (earnings, before interest and tax) margins over three to four years."
Citi said there would not be a "terminal decline" for Australian retailers.
"Retailers typically see margins begin to recover five or more years after Amazon launches Prime," Citi said.
"We expect the electronics industry to likely consolidate further, as retailers rationalise store footprints from the current over-stored position."
"Amazon is poised to drive a material earnings decline and multiple de-rating for Australian electronics retailers. We have sell ratings on both Harvey Norman and JB Hi-Fi, with expected target returns of minus 15 per cent and minus 18 per cent respectively.” JB Hi Fi shares fell 1.1% to $24.03 and Harvey Norman shares were off 1.2% at $4.10.
