JB Hi-Fi's Profit Downgrade Essay And Share Price Decline.

Background

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.”

Questions

1: Use Classical Political Economy Theory to explain JB Hi-Fi’s decision to release its profit downgrade in the way it did. Make sure you explain what Institutional Theory is, and support your observations with evidence from the case study.

2: Use the Managerial branch of Stakeholder Theory to explain JB Hi-Fi’s reporting decisions. Make sure you support your observations with evidence from the case study.

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

4: Show how the Brunswik Lens Model might be used to explain an investor's decision about whether to buy or sell shares in JB Hi-Fi following their downgrade “announcement”.

5: Some academics have criticised the accounting profession for acting to legitimise the capitalist system (supposedly by supporting the “haves” against the “have nots”. Indicate whether the case study supports the critical view of accounting, or whether it doesn’t. Use the case study to support your answer.

1: Your answer is written here. According to the classical political economy theory adequate relevant measures needs to be conducted by individuals and organisations for minimising the implementation of regulations by governments. The classical political economy theory directly explains the relevant measures that needs to be taken by organisations in the current era for nullifying the responses from appropriate authority such as ASX. According to the case study, JB hi fi has provided adequate information regarding their future profit downgrade in their announcements, which was further clarified by ASX.  this clarification instigated by ASX was mainly in appropriate measure conducted by the authorities one part of JB hi fi.  the profit downgrade that was announced by the organisation was a relatively at the levels of 3%, which was lower than the actual 5% material risk criteria.  Therefore, it could be understood that the decision made by your organisation regarding the disclosure of their profit downgrade was adequate and according to the levels of classical political economy theory. The announcement made by JB hi fi is adequate, as no extra regulations on rules were need to be implemented by the authorities in disclosing the annual report. The company has provided all the relevant information that was needed by investors and ethically depicted the fallen its profits during the fiscal year. However, it could be identified that under classical political economy theory the announcement conducted by the organisation was adequate and no further evaluation could be conducted on the actions of the company. According to the regulations, investors needs to provide adequate information regarding any kind of changes in their future profit due to the current actions taken by the management. These announcements need to be conducted immediately and separately to the investors if they have more than 5% impact on the material misstatement of the organisation. This move relatively protects the investors regarding any kind of hard decision that is made by the management which could directly affect their share price valuation overtime.

Institutional theory directly indicates that all the relevant regulations and rules effectively followed by organisations while conducting the operations. The institutional theory indicates a relative measure that needs to be taken by organisation for depicting the social obligations. The disclosure of future profit that was conducted by the company was adequate, as all the relevant information was provided by the company to its shareholders. The problems that was instigated by ASX regarding the separate disclosure of the profit downgrade was not adequate, as JB hi fi had not violated any kind of regulations. the company has adequately provided all the relevant information regarding the profit downgrade on a single announcement. the profit downgrade was less than 5% which was adequately in accordance with the material limit provided by the ASX. Hence it could be identified that under institutional theory the organisation has effectively for load all the relevant regulations to improve with social attributes in providing adequate announcements to the investors. 

JB Hi-Fi's Reasoning for Release of Profit Downgrade

2: Your answer is written here. The case study of JB hi fi is adequately evaluated under the managerial branch of stakeholder theory, which indicates that the organisation need to provide all the relevant information to the shareholders who will support them to achieve profitability. The theory directly indicates that organisation needs to provide adequate information regarding their current condition to the shareholders via all the relevant announcements. The theory also indicates that the organisation is to select a particular stakeholder to with whom it needs to share all the relevant information to help them achieve professional goals. After evaluating the case scenario, it could be identified that JB Hi-Fi has effectively selected shareholders, as the relevant stakeholders for providing all the information that is needed for understanding the future growth of the organisation. The observations made through the case study directly indicate that relevant information was provided by JB Hi-Fi to the shareholders regarding the profit downgrade in a conference. This downgrade was specifically detected on page 4 of the conference notes where little information was provided regarding the future decline in profits of the company. Therefore, from the valuation it could be identified that the organisation has effectively provided all the relevant information to the shareholders. In this context, () stated that providing information to shareholders would eventually allow the organisation to minimise any kind of negative actions from the exchange for not disclosing all the relevant information regarding their future prospects. On the other hand, () argued that disclosing critical information regarding future growth would directly impact share value of the organisation and could reduce share price of the company.

Therefore, the decisions made by JB hi fi regarding the announcement of the current year profit downgrade was adequately in compliance with managerial branch of stakeholder theory.  managers were adequately able to deliver the message to the adequate stakeholders regarding the future prospects of the organisation, which was the shareholders on a conference meeting. The Hence, the decision made by your organisation for adequately depicting the future profitability condition positively adequate, as the information was directly passed to the adequate stakeholders. This can be identified with the drastic decline and share price of the company after the announcement. The record decline of 10% in a single day was witnessed for JB hi fi after the announcement of the downgraded profit. This is the proof that the adequate information was delivered to the shareholders of the organisation, while supporting the managerial branch of stakeholder theory.

ASX's 'Please Explain'

3: Your answer is written here. From the case study it could be evaluated that adequate changes in share price of the company was witnessed after the announcements conducted by JB hi fi. The announcement was related to the Future prospects of profits that will be generated by the organisation during the fiscal year.  The information provided to the investors regarding the downgrade of profits during the fiscal year was considered an adequate trigger, which directly reduced the share price value of the organisation in the stock market. Moreover, the decline of share price by 10% on a single trading day after the announcement directly indicates the viable anticipation of the future earnings announcement conducted by the organisation. Therefore, it could be identified that the investors are adequately indicating the future downgrade of profits is a viable approach, which will in can reduce their overall income from investment. In this context, Ilaboya & Aggreh (2013) stated that investors with the effective use of announcements are able to evaluate the share price of the organisation and adequately conduct their investments in a particular stock. On the other hand, Profilet & Bacon (2013) argued that due to the negative impact of external information or factors share price of the organisation can decline and hamper investment capital of the investor.

Moreover, the evaluation of share price of the organisation directly indicates the viability of the future earnings announcement that will be conducted in the annual report of JB hi fi. this is the main reason that the share price of JB hi fi has effectively declined from 25.7 per share to 22.05 per share after the announcement.  this Rapid decline in share price of the company relatively indicates revaluation that is conducted by investors regarding the decline in profits. However, the company is directly indicating that the material misstatement of the profit downgrade is a relatively below 5%, which is considered as appropriate level according to ASX.

Therefore, after evaluating the case study it could be identified that all the relevant information that was provided by JB hi fi regarding the earnings announcement was effectively reflected on its share price. The share price of JB hi fi reflected all the relevant information regarding the future earnings announcement that was conducted by the company. However, the investment analyst Bruce Smith directly indicated that the share price decline was not viable, as the company's overall progress was adequate. Therefore, from the valuation it could be identified that Share price of the organisation has a relatively reflected the actual value of the earnings announcement that was conducted by JB hi fi.

JB Hi-Fi's Response

4: Your answer is written here.  From the evaluation of the case study under the Brunswik Lens Model, it could be identified that the organisation is able to effectively analyse the overall investors decisions regarding the buying or selling of shares of JB hi fi. Under the Brunswik Lens Model, the announcement evaluation is directly evaluated, which might instigate the investors to make adequate decisions regarding the share price valuation of the organisation.  the current announcement of JB hi fi is regarding the downgrade of its profits during the fiscal year. This announcement is relatively considered a negative attribute for the organisation, which would directly have negative impact on share price. After evaluating the case study, it could be identified that the organisation has a relatively witnessed a decline in share price after the announcement of Profit downgrade. Share price of the organisation has a relatively declined after the announcement conducted by the organisation, which are relatively indicates the behaviour of investors regarding the decline in future profit.  JB hi fi directly indicated that future profits of the organisation will decline due to the unforeseen circumstances.  However, this decision was not relatively taken by the investors which instigated a massive selling process. Therefore, from the evaluation the response of the investors can be evaluated under Brunswik Lens Model, where the investors are not able to accept the fact that JB hi fi is not able to provide all t higher rate of returns from investment during the fiscal year.  this directly instigated the enormous selling process of shares by investors which resulted in a decline of 10% in a single trading day.  Hence, under the Brunswik Lens Model it could be identified that they are investors are not happy with the decision made by the organisation which led to the decline in profit during the fiscal year

Therefore, from the evaluation of the case study it could be identified that the decision regarding the spelling of shares of JB hi fi by the investors was adequate. the accounting information provided by the company was adequate and relevant, where in future the organisation will obtain a less profit of 3% from the anticipated growth level provided to the investors. this anticipated growth level eventually allows investors to evaluate the actual share price of the company in future and conduct their investment process. Hence, any kind of decline in profits of the company full directly result to the declining share price, as valuation of the company will be altered. Thus, under the Brunswik Lens Model, it could be identified that the decision made by the investors regarding the sale of shares was adequate and in accordance with the declining future profit of the organisation.

Share Price Decline

5: Your answer is written here. The case study directly instigates and support the overall critical view of accounting, as accounting professionals directly help legitimate the capitalist system of the organisation. There are different kinds of measures that is conducted by the accounting profession for minimising the Tax amount that is imposed on the organisation. The financial crisis of 2008 can be identified as one of the major supporting that was conducted by accounting profession to legitimate the capitalist system. The organisations during the period violated norms and different regulations laid down by regulator with the help of accounting profession. The accountant relatively allowed the companies to maximize the profit with the help of capitalist system, while forcing the world economy to decline. after the financial crisis the Accountants were held responsible regarding the unethical measures used by the companies for maximizing the profit and increasing risk from investment.  Therefore, it could be understood that accounting profession directly act to legitimate the capitalist system used by organisations where is supposed have against the have nots. In this context, () stated that the Accountants were responsible for manipulating the financial report presented by the organisation in 2008, such as Lehman Brothers who nearly destroy the financial sector of the world.

The case study evaluation directly indicates the use of accounting Profession for legitimizing the capital system of JB hi fi.  The company directly uses accounting profession to analyse the future profit and the with the announcement of a decline in its profit during the fiscal year. This relatively supports the capital system and suppose we have against the have nots.  the announcement made by the organisation directly indicated that adequate accounting professionals who used in deriving the results laid down by JB hi fi.  However, the actual figures of the profit cannot be same as it might change as per the changing business environment. however, the decision made by JB Hi-Fi is management regarding the announcement directly reflected the use of accounting profession to support their capitalist system. The overall decision made by JB hi fi was supported by investment bankers such as Bruce Smith, who supported the announcement made by JB hi fi regarding the profit downgrade.  the company directly use this accounting profession to manipulate the overall future earnings of the organisation, which is not considered to be accurate as per the previous historical report.  the anticipation of the future profit and not accurate and is considered one of the anticipation that needs to be evaluated by investors regarding future growth of the organisation. () mentioned that with the help of adequate accounting measures organisations are directly using the loopholes in accounting system to support their capitalist theory and maximize the profit.