Inflation is helping to keep Harvey Norman’s sales looking healthy. But consumers may eventually tighten belts as household spending comes under pressure due to rising interest rates and higher prices for most goods. It is likely HVN will see one more good half-year of comparable sales growth before momentum swings around. We think franchisee EBITDA could fall 25% by FY24f with lower margins contributing to the slippage.
HVN’s Australian sales growth has lagged its competitors and the industry overall. This suggests HVN has been losing market share. This may be partly due to a lower level of online sales relative to its competitors although the company does not disclose its figures. It also has a weaker sales mix in products such as Apple, gaming and a limited offer in entry level laptops and monitors.
HVN’s 3-year CAGR as at the June 2022 half was approximately 7% while the furniture industry grew at nearly 11% and electronics at 9%. HVN has not been spending any less on marketing at an average of $386 million pa over the last four years.
The company’s trading update showed comparable store sales growth of 10% in its franchisee segment for July and August. The 3-year CAGR sales growth in the June 2022 half was 6.4% pa. Allowing for the strong start in July and August suggests 1H23f CAGR will be around 5%.
HVN’s overseas businesses have seen sales slowing down already. New Zealand and Ireland sales and margins were lower in 2H22, and plump trading updates reflect lockdown periods from a year ago. Cost growth is also now a factor that will weigh on EBITDA margins.
Inventory and receivables (franchisee inventory) increased ahead of sales in FY22. This may not be a problem if 1H23f sales remain healthy, but it is a factor we will be watching closely as the year plays out.
Investment View
At the interim result in February, we anticipated earnings would fade more slowly than the market was expecting. On that we have been broadly correct, but the share price reacted more negatively to the successive RBA cash rate hikes than we expected. There was seemingly no support from the very attractive dividend yield, which still sits above 7% after the final dividend was lifted as we anticipated.
Consensus earnings forecasts have fallen well below the marks set at the interim result in February. The near term sales strength may be illusory as to what is about to happen to electronics and furniture sales which typically lag rising interest rates by at least six months.
Risks to Investment View
The prospect of rising interest rates could impact the housing market which would in turn impact furniture sales for HVN. If the economy slowed down and consumer confidence was lower, then HVN’s sales might be affected. Higher interest rates could also impact HVN’s property portfolio, and the capitalisation rate applied.
Recommendation
We have reduced our recommendation from Buy to Hold.
FIGURE 1: FY22 RESULT
