Financial Management: Economic and Financial Performance of Australian Retail Industry

This study analyzes the economic and financial performance of the Australian retail industry, with a focus on two companies: JB Hi-Fi and Myer Corporations. The study is divided into two parts, addressing economic factors and comparing financial performance using 2017 financial statements.

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Executive Summary
The study seeks to address the economic and financial performance aspects facing the
Australian retail industry. The focus is on the performance of two Australian retail
companies: JB Hi-Fi and Myer Corporations. JB Hi-Fi is an ASX listed Company operating
in the Australian retail industry. The Company was established by John Barbuto (JB) in 1974.
Likewise, Myer is also an ASX listed company that operates in the Australian retail industry.
The Company was established in 1899 in Melbourne by a Russian Sidney Myer. The two
companies sell grocery and non-grocery retail products. The study is divided into two parts.
The first addresses the economic factors that affect the operation of the two companies.
While the second parts compare the financial performance of the two companies using their
2017 financial statements.

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Brief introduction
An overview of the Australian Retail industry
Over the past two decades, the Australian retail industry has posted positive performance.
The growth in household income and low-interest rate in the market have encouraged
consumers to spend more on grocery and non-grocery products. The industry has over 250
stores with both local and international origin. Wesfarmers is considered the most extensive
retail shop in Australia based on firm performance and market share. The emergence of
online retailing has increased the growth of the industry as many consumers prefer price
competitiveness and convenience offered via internet shopping (Schulz, 2008, p. 34).
Amid the success of the industry, it faces competition from other global players. The three
critical rivals of the Australian retail industry are Amazon, Lidl, and the Chinese retailers.
The growing. Australian tourism sector, the spending habit by the Australian population, and
growing population are key factors that encourage entrant of international competitors into
the local industry.
History mission statement of the JB Hi-Fi and Myer Companies
a) JB Hi-Fi Company
JB Hi-Fi is an ASX listed Company operating in the Australian retail industry. The Company
was established by John Barbuto (JB) in 1974 as a single store known as East Keilor in
Victoria. From a single store, JB Hi-Fi has grown to become a significant competitor in the
Australian retail industry. The Company sells a variety of products such as electronic
products, kitchen equipment, car sound systems, games, and movies. JB Hi-Fi has several
subsidiaries both in Australia and New Zealand with at least 250 stores across the two
countries. The Company recorded an impressive financial performance in 2017. Its

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Australian sales rose by 11% to $4.2 billion in 2017 contributing to an increase in its
operating cost by 19% to $262 million (Plunkett, 2005, p. 171).
b) Myer Company
Myer is an ASX listed company that operates in the Australian retail industry. The Company
was established in 1899 in Melbourne by a Russian Sidney Myer. Myer grew into a
significant competitor in the retail store through the development of new stores and the
acquisition of the existing ones. For instance, Myer acquired Western Store, Gosford, Grace
Brothers, and Boans in 1961, 1968, 1983 and 1984 respectively.
Myer sells a variety of products such as women's and men's clothing, children's and babies'
clothing, accessories and footwear, computers, electrical, furniture, homeware, bedding,
video games, toys, and foodstuff among others. In 2017, the company registered a
disappointing financial performance. Myer recorded a profit of $11.9 million profit which
was an 80% reduction compared to the profit posted in 2016. Likewise, sales dropped by
1.4% to $3.2 billion in 2017. The decreased in profit was attributed to increased operating
cost and expenses like impairment charges (Productivity Commission, 2011, p. 213).
Top-down analysis
The top-down analysis focuses on the bigger picture before narrowing down to smaller
details. This section addresses the global economic performance before narrowing down to
the Australian and industrial economic performance respectively and how they impact the
economic position of JB Hi-Fi and Myer Companies.
a) Industry Analysis
According to the World Bank Group is expected to grow at a slow rate before slowing in the
next three years. The slow growth will be caused by decelerating growth of developed

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economies and employee layoffs in developing and emerging economies. However, the
growth would not support the millions of people living below the poverty level. Therefore,
many people will remain either no incomers or low incomers which reducing their purchasing
power (Bailey, 2005, p. 67).
Social and economic factors drive the Australian retail industry. The key drivers in the
growth of the industry are increasing purchasing power, growing population, and positive
economic growth. The compound annual growth rate (CAGR) of the Australian retail
industry was projected to grow at 2-3% between 2013 and 2018. However, the industry had
the second lowest growth rate in the Asia Pacific (Clain & Coffee, 2004, p. 78).
Australia has a flexible market where the rise and fall in the retail industry are familiar. The
Australian retail had a size of $140 billion in 2017. The economy has been characterised by a
low-interest rate which improves the consumers' purchasing power. Moreover, the industry-
driven increasing confidence, increasing net worth and rising disposable income (Couto,
2017, p. 57).
Five factors have shaped the economic performance of the Australian retail industry;
i. Population growth and employment: The Australian labour market has remained
steady in the last five years. However, the unemployment rate has inclined over the
same period. Therefore, consumers have fewer dollars to spend. In additional to the
decreasing savings trend, consumers are left with fewer funds to spend on retail
products (Chenery, 2014, p. 90).
ii. Government Policies: The government has introduced policies that restrict excessive
borrowing from banks. On the other hand, the Australian government is involved in
the Trans-Pacific Partnership which is an opportunity of creating trade opportunities
for its retail industry in the foreign economies (Petermans, 2016, p. 71).

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iii. Housing and Inflation rates: The interest and inflation rates have remained low in the
Australian industry. Household ability to create wealth has also risen. Such trends
support investment which boosts consumption rates by households (Robbins, 2014, p.
181).
iv. Exchange rate: The Australian dollar has depreciated. Depreciation has increased the
import cost leading to a reduction of the profit margin. On the other hand, the
depreciating exchange rate of the Australian dollar has boosted the online segment of
the retail industry because the international retail products have become relatively
unaffordable. The dollar has stabilised over the past five months, and the trend is
expected to continue in the coming years (Armstrong, 2014, p. 143).
v. Business cycle: The Australian retail industry is at its maturity stage of the business
cycle. The industry's growth rate has slowed down, and the trend is expected to
continue in the foreseeable future. The industry is facing stiff competition from other
global industries such as China, the UK, and the US.
b) JB Hi-Fi and Myer Companies
The performance of the JB Hi-Fi and Myer Companies is directly affected by the Australian
economy. The Australian economy is facing a sustained recession. Studies have shown that
the real unemployment rate in Australia rose to 1.422 million people in 2017 representing an
11% increase. Compared to 2016, the number of unemployed people increased with at least
60,000 in 2017. Likewise, the number of underemployed people increased by 7.8% to 1.011
million in 2017. Conversely, over 2.6 million Australians are looking for extra work as a way
to sustain their household expenses (Hubbard, 2014, p. 319).
Increased unemployment rate and prolonging economic recession have an adverse effect on
the Australian retail industry. The consumers buying behaviour is likely to change; the ability
of consumers to spend on retail products have reduced. With the increasing number of

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unemployed and low income population, the number of consumers expected to make retail
purchases will reduce. Consumers have become price sensitive and are more likely to buy
low priced products compared to high priced products. Therefore retailers such as JB Hi-Fi
and Myer should take notice of the changing buying behaviour by consumers and implement
favourable countermeasures that would ensure sustainable operation (Ikeda, 2015, p. 213).
JB Hi-Fi has put in place several countermeasures to maintain its market share and
competitive advantage in the industry. The Company offers its products at a lower price
compared to its competitors. Using cost-effectiveness as a competitive strategy, JB has
managed to maintain and strengthen its position in the market (Goodland, 2001, p. 115). The
price advantage strategy is a countermeasure to the economic recession and the decreasing
number of consumers with high buying power. However, the company has done less on its
marketing strategy. JB Hi-Fi should provide quality products just like its competitors at a
lower price. The strategy would improve the company's sale volume and hence its
profitability.
The growth and expansion of Myer Company depend on the stability of the Australian
economy. The prolonged recession of the Australian economy is evident in the 2017 annual
report of Myer retail store. In 2017, the company registered a disappointing financial
performance. Myer recorded a profit of $11.9 million profit which was an 80% reduction
compared to the profit posted in 2016. Likewise, sales dropped by 1.4% to $3.2 billion in
2017. This shows that the weak economic growth directly impacted the performance of Myer.
The company is expected to experience reduced its sales if the economic recession is not
sustained (Gillespie, 2014, p. 78).

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Bottom Up analysis
The bottom-up analysis focuses on the performance of an individual Company rather than the
entire industry where the business operates. The analysis focuses on aspects such as financial
performance, products and services and quality management of an organisation. Bottom-Up
analysis can also be used to compare the financial performance of two or more companies
operating in the same industry. This section compares the financial performance (ratios) of
the JB Hi-Fi and Myer retail store companies operating in Australia. The ratio will also be
compared with the respective industrial ratios (Brigham & Ehrhardt, 2014, p. 89).
Financial Ratio analysis for JB Hi-Fi and Myer Companies
Ratio analysis is used to examine and the company's financial performance in the market. The
information used in ratio analysis is obtained from the historical and current financial
statements as well as the industrial information. Ratio analysis is used to test financial
performance in term of liquidity, efficiency, solvency, profitability, Market Prospect, and
coverage ratios.
a) Liquidity ratio evaluates a company's ability to its short-term financial obligations.
The common liquidity ratios include the current ratio and quick ratio.
b) Solvency/ Leverage ratio evaluates the level of a company's debt with its equity,
assets, and earnings. Example of solvency ratios is a debt to assets, debt-equity, and
interest coverage (Maynard, 2017, p. 46).
c) Profitability ratios evaluate how profitable a business is from its operation. Example
of profitability ratios include a profit margin, return on equity, return on assets, and
return on capital.
d) Efficiency ratios examine how a company uses its assets to create sales and profit.
Example of efficiency ratio includes asset turnover and inventory ratios.

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e) Coverage ratio to evaluate the ability of the company to pay interest arising from their
operations (English, 2011, p. 69).
f) Market Prospect ratios evaluate the earnings from investment projects. Example of
market prospect ratios includes P/E, dividend payout and earnings per share.
The financial ratio analysis for the two companies as well as that of the Australian retail
industry have been summarised as shown below;
Ratios JB Hi-Fi Myer Industry
Current Ratio 1.32 0.95 1.17
Quick Ratio 0.35 0.16 0.4
Total Asset Turnover
2.77 1.54 3.31
Receivables Turnover
125.77 169.81 87.04
P/E Ratio 12.37 -0.93 15. 95
Gross Margin 21.72% 44.56% 28.14%
Net Margin 3.4% -19.01% 4.21%
Return on Assets 9.42% -29.22% 13.59%
Return on Equity 25.9% -58.67% 41.11%
Debt to Equity 49.54% 25.54% 13.4%

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Ratio Explanation (Based on the ratios)
 Current Ratio
Current ratio indicates the ability of a company to meet its short-term financial obligations.
Current assets calculate the ratio by current ratios.
JB Hi-Fi has the highest current ratio compared to Myer Company. JB Hi-Fi can meet its
short-term obligations while Myer cannot.
 Quick Ratio
The quick ratio indicates the ability of a company to meet its short-term obligations using its
most liquid current assets. The ratio is calculated by current assets (fewer inventories) by
current liabilities (English, 2011, p. 70).
The two companies cannot meet their short-term financial obligations based on the quick
ratio. The ratio is less than one.
 Total Asset Turnover
The ratio measures the ability of a company using its total assets. Total asset turnover is
calculated by dividing total sales by average net fixed assets (Kapil, 2013, p. 165).
JB Hi-Fi has the highest asset turnover ratio (2.77) while Myer has the lowest (1.54).
However, the two ratios were lower than the industry ratio (3.3.1).
 Receivables Turnover
The ratio measures the ability of a company using its receivables. Receivables turnover is
calculated by dividing total sales by total receivables.
Myer has the highest receivable turnover ratio (169.81) while JB Hi-Fi has the lowest
(125.77). However, the two ratios were higher than the industry ratio (87.04).

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 P/E Ratio
The valuation ratio is used to examine market share price based on earnings. P/E ratio is
calculated by dividing the Market price of a share by earnings per share.
Myer has the highest P/E ratio (12.37) while JB Hi-Fi has the lowest (-0.93). However, the
two ratios were lower than the industry ratio (15.95).
 Gross Margin
The ratio shows the percentage of a company's gross profit that was realised from the total
sales. The ratio is calculated by dividing gross profit margin by the total sales and expressing
it as a percentage.
JB Hi-Fi has the lower gross margin ratio (21.72%) compared to Myer's 44.56% has the
higher ratio (-0.93). The ratio of the industry stood at 28.14%.
 Net Profit Margin
The ratio is used to examine a percentage of total sales which contributed to net profit
margin. The ratio is calculated by dividing net profit margin by the total sales and expressing
it as a percentage.
JB Hi-Fi has a higher net margin ratio (3.4%) compared to Myer's -19.01 %. The ratio of the
industry stood at 4.21%.
 Return on Assets (ROA)
The ratio examines earnings from a company's total assets. The ratio is calculated by dividing
net income (plus interest expenses) by average total assets.
JB Hi-Fi has a higher net margin ratio (9.42%) compared to Myer's -29.22 %. The ratio of the
industry stood at 13.59%.

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 Return on Equity
The ratio examines earnings from a company's total equity. The ratio is calculated by
dividing net income (plus interest expenses) by average common equity.
JB Hi-Fi has a higher net margin ratio (25.9%) compared to Myer's -58.67 %. The ratio of the
industry stood at 41.11%.
 Debt to Equity
Debt to Equity ratio is used to test a company's financial leverage. It is calculated by
expressing debts as a percentage of total equity.
JB Hi-Fi has a higher net margin ratio (49.54%) compared to Myer's 25.54%. The ratio of the
industry stood at 13.4%.
Summary and Recommendations
The study evaluated both the economic and financial performance of the JB Hi-Fi and Myer
Companies which are ASX listed companies. The study showed that tourism sector, the
spending habit by the Australian population, growing population, and economic performance
are key factors that encourage the growth of the Australian retail industry.
Increased unemployment rate and prolonging economic recession have an adverse effect on
the Australian retail industry. With the increasing rate of unemployment, the number of
consumers expected to make retail purchases will reduce.
Therefore retailers such as JB Hi-Fi and Myer should take notice of the changing buying
behaviour by consumers and implement favourable countermeasures that would ensure
sustainable operation.

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First, the companies should put in place several countermeasures to maintain its market share
and competitive advantage in the industry such as offering products at lower prices compared
to competitors.
Second, the companies should focus on improving their marketing strategy by providing
quality products at lower prices. The strategy will improve the companies' sale volume and
hence their profitability.

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