By Claire Reilly

Following JB Hi-Fi’s profit downgrade last week, a leading industry analyst has said that the company’s weaker than expected profit forecasts were the result of market-wide discounting, led by Harvey Norman.

In a report on the JB Hi-Fi trading update, director and retail analyst at RBS Equities, Daniel Broeren, said it was “most likely” that the “recent level of aggressive discounting is the result of a short-term play for market share” by consumer electronics retailers.

“To establish if or when industry discounting will ease, we need to go to the source,” said Broeren in the report. “In our view, the source of intense tactical discounting is Harvey Norman, and primarily to force industry consolidation. The destructive clearance activity seen by WOW Sight & Sound and Dick Smith is symptomatic of Harvey Norman’s tactical discounting, and is temporary.

“Harvey Norman has made no secret of its desire for a more consolidated segment, and has been acting accordingly. We expect the disruption of store closures and inventory clearance to pass and gross profit margins to recover (in part).”

Click here to sign up for our FREE daily newsletter
Follow Current.com.au on Twitter

According to Broeren, the aggressive discounting will stop when the opportunity to consolidate market share and pick up the customers lost by WOW and Dick Smith also dries up. Consequently, he argued that the “key catalyst” for this would occur when Woolworths announces its plans for the future of Dick Smith.

“There are two clear scenarios for Woolworths, sale or internal restructure, and each should trigger an easing of tactical pricing,” he said.

“Dick Smith will either: 1) be sold to a new and committed owner with intentions and funding to support the business medium term, or 2) be retained by Woolworths to be downscaled or closed, which ultimately achieves what Harvey Norman is aiming for. Either way, resolution should arrive before Woolworths’ full-year result in August.

“In the scenario that Dick Smith is retained by Woolworths (downscaled or closed) it will likely bring more protracted margin pressure and therefore downside risk to our new FY13 forecasts. From a positive perspective, this will again be temporary and ultimately benefit the market share of JB Hi-Fi and Harvey Norman.

“In our view, 2H12 should be a low point for earnings. As irrational discounting eases and with pending new product releases in the TV category specifically, earnings momentum should recover soon. A series of interest rate cuts would also be beneficial.”

In the trading update released to the ASX last Friday, JB Hi-Fi signalled that it was eyeing off market share previously held by Dick Smith and WOW Sight & Sound, going so far as placing dollar figures on the worth of these sections of the market. Terry Smart said the closure of competitors’ stores represented a “good opportunity” for JB to get ahead in the long run.