Australia | Nov 28 2019
Australian sales remain the critical weak spot for Harvey Norman in the lead up to the festive season as the retailer's key categories face a tough consumer environment.
-Australian decline puts pressure on core franchising operations
-Sales volatility expected over the Christmas/New Year period
-International stores and property earnings remain firm
By Eva Brocklehurst
A number of Harvey Norman's ((HVN)) key markets have slowed since July/August and the slowdown in Australia has been significant. This is in contrast to The Good Guys ((JBH)), which experienced its rate of comparable decline easing in September, and consistent with recent updates from furniture retailer Nick Scali ((NCK)).
Australian franchisee business sales were up just 0.6% for the year to October, implying a contraction in September/October of -1.9% from a 3.3% growth rate in July/August. Like-for-like sales, similarly, declined -2% in September/October from growth of 3% in July/August.
The Australian decline puts pressure on the core franchising operations by way of lower franchisee fees and the potential for higher tactical support, Ord Minnett points out.
Citi downgrades like-for-like sales forecasts for the first half to growth of 0.8%, as Australian sales have proven volatile, and assumes sales improve over November and December as a soft comparable will be cycled from the prior year.
Citi also points out JB Hi-Fi delivered like-for-like sales growth of 3.7% over the September quarter, and the difference reflects the fact that this company is outperforming in its core electronics categories while furniture & bedding (Harvey Norman's forte) is relatively tough.
Conditions should improve over the next 12 months, the broker asserts, as recent cuts to interest rates and the churn in housing should inspire consumer spending.
Trading updates across retailers have been mixed in September and October, with improvements for Wesfarmers ((WES)), JB Hi-Fi, Beacon Lighting ((BLX)) and Super Retail ((SUL)) contrasting with a slowdown for Harvey Norman, Lovisa ((LOV)) and Adairs ((ADH)).
Macquarie assesses Australian consumers are buying small ticket items and the slowdown in housing turnover is affecting the larger purchases. Black Friday and Christmas will be key selling periods and the broker will revisit assumptions at the first half result in February.
UBS believes Harvey Norman is executing well offshore and this part of the business should grow over a three-year period at a compound rate around 9% vs Australia at just 1%.
Headwinds in Australia are envisaged, via increased competition and following years of industry consolidation, which could mean the company's ability to gain market share is thwarted and margins come under pressure. Still, UBS notes Harvey Norman has a strong balance sheet and asset backing.
Macquarie agrees that the 50% of operating earnings (EBITDA) accounted for by international stores and property are in reasonably good shape. New Zealand continues to show relative strength and exceeded expectations, although sales growth moderated to 4.7% from the 5.2% experienced in July/August. The broker highlights the NZ consumer is now under more pressure.
Singapore is struggling, Macquarie notes, with comparable sales contracting -13.2%, although strong comparable sales were being cycled. Malaysia, on the other hand, improved to growth of 12.0% which was driven by the rolling out of stores. Comparable sales growth of 7.3% was experienced in Slovenia and Croatia, albeit below expectations. Ireland and Northern Ireland grew 7.2% and 9.7%, respectively.
The company's flagship store appears to have been be successful in Australia, Ord Minnett notes, following the roll-out of flagship stores internationally. Harvey Norman had indicated it wanted to witness a 12-month trading history before rolling the concept out in Australia and New Zealand.
However, no other local flagship store has been announced. Premium re-fits will occur in Cairns, Aspley, Balgowlah, Campbelltown, Preston and Hamilton and Mount Wellington in New Zealand.
Macquarie notes corporate governance remains an issue for the company. Harvey Norman has received a second strike against its remuneration report at the AGM. The move to spill the board and remove CEO Katie Page were both unsuccessful.
FNArena's database has four Hold ratings and two Sell. The consensus target is $3.98, signalling -7.9% downside to the last share price. The dividend yield on FY20 and FY21 forecasts is 6.2%.
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