JB Hi-Fi Ltd (ASX: JBH, OTC: None) has a proven track record of successfully entering new categories to continually grow and expand its business. The next frontier, following the successful rollout of a web-based presence, is the AUD4.6 billion home appliances market.

New growth areas were significant contributors to comparable sales growth during the six months ended Dec. 31, 2013, as online revenue grew at double-digit rates, its share of total revenue rising by 10 percent.

And the nascent expansion into refrigerators, washers, dryers, dishwasher, ovens and other, smaller convenience items has exceeded management expectations, with strong comparable sales numbers for stores converted to the “JB Hi-Fi Home” concept.

Management reported fiscal 2014 first-half net profit after tax (NPAT) of AUD90.3 million, up 10 percent from AUD82.1 million for the prior corresponding period. Sales for the half year were AUD1.94 billion, up by 6.6 percent from AUD1.82 billion for the six months ended Dec. 31, 2012.

Comparable sales growth was 2.8 percent. Gross margin improved by 11 basis points to 21.6 percent. Cost of doing business (CODB) was 13.9 percent, up slightly from 13.8 percent, resulting in earnings before interest and taxation (EBIT) of AUD132.9 million, up from AUD123.7 million, and an EBIT margin of 6.8 percent, which was flat year over year.

Continuing growth is rooted in JB Hi-Fi’s success at leveraging its brand and adapting to an ever-changing retail landscape.

Management noted positive comparable sales across the majority of its hardware categories as well as the successful introduction of home appliances and strong growth in its commercial division.

JB declared an interim dividend of AUD0.55 per share, up 10 percent from an interim dividend of AUD0.50 for fiscal 2013.

As of Dec. 31, 2013, JB had 182 stores, including 169 in Australia and 13 in New Zealand.  The company opened five new JB Hi-Fi stores during the first half of the year and one new JB Hi-Fi Home store, all in Australia.

Management expects to open a total of eight new stores in during fiscal 2014, with a long-term target of 214 stores.

Seven existing stores were converted to JB Hi-Fi Home. Management now anticipates converting a total of 13 existing stores to the Home format during the current fiscal year and sees the potential for approximately 50 Home stores over the next three years, with the long-term opportunity still to be fully quantified.

The newly converted Home stores, although in their early stages and benefiting from limited customer awareness, have performed strongly, achieving 13.6 percent comparable sales growth post-conversion. With less than 9 percent of its stores converted, the continued rollout of the new Home stores presents JB HI-FI with a significant opportunity to increase comparable sales growth into the future.

Online sales continue to grow, rising by 15.4 percent and now accounting for approximately 2.2 percent of total sale, up from 2 percent during fiscal 2013. Unique visitors to JB’s websites– including the JB Hi-Fi Now digital offering–increased by 17.8 percent over the previous 12 months to an average of 1.23 million per week.

JB Hi-Fi Now allows customers to choose how they shop at JB Hi-Fi, for both physical goods and digital content.

The second half of the year is off to a strong start, with January 2014 sales growth of 7.4 percent, including 3.8 percent comparable sales growth.

Management has guided to fiscal 2014 total sales growth of 6 percent to 8 percent. NPAT is forecast to be AUD126 million to AUD129 million, year-over-year growth of 8.3 percent to 10.8 percent.

New store growth will be critical to JB’s ability to meet management’s guidance, though the online unit, the commercial business and the Home format have demonstrated their ability to drive expansion.

The sale of televisions should also contribute to comparable sales growth. Average selling prices will be supported by new product development in larger screen sizes. Volume growth has been negative, but it could return to growth due to technology innovation and as prices for new products, such as ultra-high definition and, to a lesser degree, curved panel technology TVs, come down. The longer-term question remains the rhythm of the television replacement cycle.

Gaming hardware supply from Sony Corp (Japan: 6758, NYSE: SNE) and Microsoft Corp (NSDQ: MSFT) should provide a boost to second-half earnings, while software arrivals are expected to increase as of March. This should moderate the broader challenges that exist
across music and DVDs for the software category.

Another major driver going forward is the expansion of the JB Hi-Fi Home format, a rollout that accesses a large market and provides a source of long-term growth.

In November 2012 management announced the entry into the appliance category on a trial basis, with an initial base of 16 stores. JB’s ambitions have grown with the success of its brand in the new category, with a new goal of 50 stores by the end of fiscal 2016.

Results to date support annualized incremental sales per store of approximately AUD3 million during the first year, increasing to approximately AUD5 million in the second year. The longer-term sales opportunity is yet to be fully quantified.  Gross margins are expected to be above the company average in the medium term.

JB Hi-Fi Home is definitely a positive for the overall investment thesis for JB Hi-Fi, as it reduces some of the revenue and earnings challenges embedded in some of its more traditional electronics products. For example, home appliances is a market where JB can use its name to grow market share, and quickly.

At the end of the day, sales for JB Hi-Fi, JB Hi-Fi Now and JB Hi-Fi Home depend on the behavior of Australian consumers. But recent data indicate an improving environment for discretionary retailers.

The Reserve Bank of Australia has sent strong signals that it intends to keep interest rates at or near historically low levels for at least the near future, which should provide support not only for the housing market–a key for JB Hi-Fi Home, in particular–but also for job growth in non-resource sectors of the Australian economy.

JB’s sales growth was robust during the first half of fiscal 2014 despite gaming challenges. Online, Home and the return to growth for the visual category (TVs) should drive more growth through June 30 and into fiscal 2015.

The company has posted consistently solid, resilient EBIT margins have been resilient and should remain stable.

Recent updates from management have been positive, demonstrating improving trends in sales and NPAT. JBH is well-positioned compared to other small- mid-cap discretionary retailers and should benefit from a strengthening Australian economy.

JB Hi-Fi, a new addition to the AE Portfolio Aggressive Holdings, is a buy under USD18 on the Australian Securities Exchange (ASX) using the symbol JBH.

JB Hi-Fi closed at AUD18.97 on the ASX on March 14, approximately USD17.15 based on the prevailing Australian dollar-US dollar exchange rate.

JB’s financial year runs from July 1 through June 30. The company reports full financial and operating results twice a year; it typically posts first-half results in early February, with full fiscal year numbers out in mid-August.

Interim dividends are usually declared in early February, along with the announcement of half-year results, with payment typically made in late February or early March. Final dividends are usually declared in mid-August, with payment made in early September.

Management declared an interim dividend of AUD0.55 on Feb. 3, along with fiscal 2014 first-half results. It was paid on Feb. 28, 2014, to shareholders of record as of Feb. 14. Shares traded ex-dividend as of Feb. 10.

JB’s final dividend in respect of fiscal 2013 was declared on Aug. 12, 2013, and paid on Sept. 6, 2013, to shareholders of record as of Aug. 23, 2013. Shares traded ex-dividend on this declaration as of Aug. 19, 2013.

Dividends paid by JB Hi-Fi are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the analysts who cover the stock, seven rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology. There are nine “hold” and two “sell” ratings on the stock at present. The “best consensus” 12-month target price among the 15 analysts that provide such a number is AUD20.03, with a high of AUD24.15 and a low of AUD18.

Based on is AUD18.97 March 14, 2014, closing price on the ASX and a current annualized dividend rate of AUD0.75 per share, upside from here over the next 12 months is approximately 9.5 percent.