Question

CASE

JB Hi-Fi unapologetic on profit downgrade

By Eli Breenblat 8 May 2018

Consumer electronics giant JB Hi-Fi is sticking by its reasoning for releasing a profit downgrade buried deep within a presentation to analysts last week, rather than make a stand-alone statement to the stock exchange. This follows being hit with a “please explain” by the ASX (Australian Stock Exchange) in the wake of the earnings warning that sent its shares plummeting.

JB Hi-Fi yesterday issued its response to detailed questioning from the ASX and the presentation by chief executive Richard Murray at the Macquarie Australia Conference, where during a lengthy talk on the retailer he handed out a 3 per cent revision to its full-year net profit guidance.

The profit warning was contained on page 4 of a 14-page presentation to the conference, and when it was lodged with the ASX on the day it was titled Macquarie Australia Conference Presentation, with no reference to the profit warning.

Shares in JB Hi-Fi sank 10 per cent after the consumer electronics giant cut its profit forecast for fiscal 2018 at the conference, marking the stock’s biggest single-day fall since 2011. The ASX issued JB Hi-Fi with a series of questions over its communication of the downgrade to the market, pushing the retailer to explain why it wasn’t released as a stand-alone statement.

“The company’s revised net profit after tax guidance was a decrease of 3 per cent from the midpoint of the company’s previous NPAT guidance,’’ JB Hi-Fi said in its response to the ASX.

“JBH notes guidance in section 7.3 of Guidance Note 8 issued by the ASX which suggests that companies should treat an expected variation in earnings compared to its published guidance equal to or less than 5 per cent as not being material and presume that its guidance therefore does not need updating.

“JB Hi-Fi did not consider that the information contained in the fiscal year 2018 outlook slide would have a material effect on the price or value of the entity’s securities,” the statement said.

Bruce Smith, principal at Alphinity Investment Management, said he was “surprised” by the ASX’s query of JB Hi-Fi. “I’m surprised by it considering the announcement on earnings fell short of the ASX’s own definition of materiality,” he said. “While the share price move was a little greater than the downgrade, that was something that could not be known by the company in advance.”

Question: To what extent do current share prices anticipate future earnings announcements? Use the case study to support your answer.

Answer 1

JB hi-fi revised downward their net profit after tax by 3% of the midpoint of the previous NPAT (Net profit after tax) forecasted, the result was the share price fell by10% in a single day.

The share price or stock valuation reacts to change in quarterly profit statements, Though there is no direct correlation between stock price and net profit after tax of the organization the stock traders keep a close eye on the NPAT reporting and matching with earlier forecasted profit to study the macros of the organization.

The earnings announcement is an increase in NPAT, the market reaction will be positive the share price will increase as it foresees a good future for the organization and assumes the decisions of business and the management of the organization is strategically correct in the execution of business plans. The share price reacts to the earning reported but will slowly drift to its original levels also depending on the efficiency of the stock market. The sudden increase or decrease is seen primarily in the earnings announcements.

The efficient market will try to correct the share price to link earning announcements and share prices:

1. Current period earning predicts future earnings (profitability)
2. Information of future developments and future expected dividends
3. Determine the share value which also predicts present value of expected future dividends.