Harvey Norman, Lockdown Restrictions Reduce Sales...

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Harvey Norman, Lockdown Restrictions Reduce Sales


Lockdown restrictions reduce sales by 8.8 percent and pre-tax earnings by $120 million or 35.5 percent, based on 2022 unaudited financial year-to-date numbers.

  • Australian Franchisees most impacted, with sales revenue down 11.3 percent
  • Pre-tax earnings down 35.5 percent, given Australian Franchising operations account for 53 percent of pre-tax earnings and 71 percent of Total System Sales revenue
  • No FY22 earnings guidance, citing COVID uncertainty
  • Reliance on $3 billion bricks and mortar retail sales model in face of e-commerce sales growth poses strategic dilemma for Harvey Norman

Harvey Norman Holdings Limited (‘Harvey Norman‘ or the ‘Company‘) is an integrated retail, franchise and property business that sells furniture, bedding, computers, communications and consumer electrical products. Its franchising operations comprise 539 independent franchisees selling under the Harvey Norman banner. The offshore company-operated retail segment comprises 107 company-owned Harvey Noman branded stores, in 7 countries. The property segment of the business owns 49.5 percent of the 192 Australian franchised complexes, that include warehouses adjacent to the retail stores. The Company’s franchising operations contribute approximately 53 percent of earnings while the property segment and offshore company-operated retail segment account for the remainder of earnings, roughly on an equal split.

Retail Trading Update

Harvey Norman today released aggregated sales revenue numbers showing a 8.8 percent decline for the 5 months to November 2021, compared to the previous corresponding period. Aggregated sales include offshore company-operated stores and independent franchised complexes throughout Australia. Offshore sales, with the exception of New Zealand, fared much better than Australian franchised operations, which are down 11.3 percent.

The overall 8.8 percent revenue decline translates to a 35.5 percent drop in pre-tax earnings for the Company for the 4 months period to 31 October 2021. This is a significant earnings decline of approximately $120 million pre-tax, down from $337.1 million, in the 2020 corresponding period.

The 35.5 percent earnings slump is explained by the Australian franchising operations accounting for 53 percent of Harvey Norman’s pre-tax earnings and having increased by 80 percent in FY21, compared to FY20. It is the Australian Franchisees of the Company who have been most impacted by the rolling lockdowns imposed by State Governments, in that 168 franchised stores across the country were shut at various times during the period, where sales have declined by 11.3 percent, compared t 8.8 percent across the Group. To put the significance of Australian franchising operations in perspective, $6.9 billion Total System Sales revenue of $9.7 billion (71 percent) is derived from Australia.

Harvey Norman derives a healthy 9 percent revenue margin on franchise fees received from franchisees, so any decline in franchisee sales is going to have a significant impact on earnings.

Future Outlook

The Company did not disclose earnings guidance, citing the impact of COVID uncertainty on the future state of the economy.

While a vaccine led recovery seems the most likely outcome based on a number of recent consumer and household confidence surveys, just how this will translate into retail earnings growth for Harvey Norman is unclear. Global supply chain constraints and associated rising shipping costs have the potential to sour what may otherwise appear to be a strong Christmas and post-Christmas sales period for retailers like Harvey Norman.

Another factor is that while Harvey Norman considers their $3 billion retail property portfolio to represent income security, the unrelenting growth of e-commerce sales may challenge this assertion. Harvey Norman is now responding to the importance of e-commerce by offering Contactless Click & Collect and home delivery from their franchised complexes. However, retail giants like Amazon are expanding their online operations globally and this is likely to challenge the strong market position of Harvey Norman’s bricks and mortar retail model.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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