No Harvey, No

1H23 RESULT

Need To Know

• Profit before tax fell -14.6% on pcp, boosted by property revaluations of $107m
• Sales and margins under pressure in 2023
• Interim dividend cut to 13cps, as expected 

A soft result and weak trading update says Harvey Norman’s sales and margins are heading downwards this year. We are reviewing our recommendation.

Result. 1H23 profit before tax fell -14.9% to $522.7m compared to a very strong result last year. The core franchising segment PBT declined by -18.9% on 1H22, overseas retail PBT fell -22.5% and the property segment fell -5.8% as the net property revaluation increase of $107m softened the decline. Total system sales fell -3% leading to a group EBITDA decline of -5% for the period.  Group EBITDA $431m compared to census expectations of $450m

Franchise system sales increased 2.3% but EBITDA fell -10% year-on-year. Worse, EBITDA margins also went backwards to 9.5% although this is still well above the 6.7% reported in 1H20 pre-COVID.

Understandably, the terrible weather conditions in New Zealand meant like-for-like sales fell 5.6% and EBITDA declined 28%.

HVN’s franchisees have too much stock. Receivables were $1.1bn, up 48% on last year and inventory was $598m, up 6.9%. 

Investment View

Expect to see a larger-than-usual TV bombardment by HVN as it attempts to get rid of its excess stock. Those ‘interest free’ terms will push out quickly. In 1H23, HVN spent $21m extra on advertising as part of the company’s ~$200m marketing budget.

Mr Harvey gloated in March 2020 about the opportunity COVID had provided for his business. “Our sales are up by 9% on last year. Our sales in freezers are up 300%. And what about air purifiers? Up 100%!”, Mr Harvey boasted in a 60 Minutes interview. 

HVN has low gearing and a strong enough market position to ride out a slower sales period, and it will protect its franchisees ahead of shareholders who have already had their dividend cut at this result.

HVN is looking to expand in Malaysia with the first of two new stores in Hungary to open in calendar 2024.

The trading update for January was very weak with Australian comparable sales -10.4%, NZ -8.4% on pcp. Together with too much inventory, HVN is heading for an earnings decline this year, depending on how hard Mr Harvey pulls the discounting lever.

We are reassessing our recommendation in anticipation of meaningful consensus earnings downgrades.