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: 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”.

Answer 1

Behavioural Research:

Behavioural Research comes from the discipline of psycology and is grounded in behavioural decision theory

The goal of behavioural research is to describe and try to predict actual decision behaviour. It might be able to reasonably predict what a person will do.

The Brunswik Lens Model

The BLM believes that a person the environment through a set of imperfect cues and acts accordingly

Two sides to the Lens Model

1. The right hand side explores how the decision maker uses cues to make decisions, and which cues are used.

2. The left hand side explores the relationship between the actual outcome and phenomena and the associated cues

Three level Analysis

The lens model offers the three levels of investigation on how decisions are made:

1. Input level: At this level, investigators consider the form and nature of the cues used to inform decision making, including their measurment capabilities, how they are presented and in what context.

2. Information processing level: What are the charateristics of the decision makers? What kind of rules are followed for decision making?.

3. The output /Decision level: How effective was the decision? Did it align with expectations? How effective were cues in predicting reality? Was the decision maker able to reflect on the decision and amend future decions accordingly.

The Use of Accounting Information as Input cues

Much accounting research has taken place at the input level, especially on

• What accounting information wasd used,
• What accounting information was not used
• How and where was it presented.

Some surprising research findings have Resulted

Some of the most interesting results include.

1. Investors quite prefer historical cost for making investment decisions
2. Decision makers are responsive to grphical representation like charts, Tables
3. No significant difference to decision making whether information is a line item in a statement or contained in a footnote.
4. when presented with other financial information, segment /industry information was used more than past share prices for decision making.  

Conclusion :

Here finally This modrel concluded that Material facts and reliable information should presented in the footnote of the financial statements.So JB hi-fi didn't presented their facts and material information to the AXS's query so that company earnings were fell short in 2018. So investors should be away with this stock i.e. don't buy the buy the stock.