Sep 5, 2023

Sentiment: Sideways

Type of Trade: Conservative


Sector: Consumer Discretionary

As per FY23 Results

Harvey Norman is a well-known retail company that operates in the electronics, home appliances, furniture, bedding, and technology sectors. Established in Australia, Harvey Norman has expanded its operations internationally and is recognised for its diverse range of products and its unique business model. Harvey Norman is now a multinational retail company known for its broad range of consumer products, franchise-based business model, and global presence. Its offerings span from electronics to furniture, making it a one-stop destination for a wide variety of customer needs.

Product Categories: Harvey Norman offers an extensive range of products across multiple categories, catering to the needs of both individual consumers and businesses. Some of the key product categories include:

  1. Electronics: This includes items like televisions, audio systems, cameras, and other electronic gadgets.
  2. Home Appliances: The company offers a selection of kitchen appliances, laundry machines, air conditioners, and more.
  3. Furniture and Bedding: Harvey Norman sells a diverse range of furniture for different rooms, as well as mattresses and bedding accessories.
  4. Computers and Technology: The company is known for its selection of computers, laptops, tablets, and other technology products. It also offers accessories and services related to technology.

Business Model: Harvey Norman operates on a unique business model that involves a combination of company-owned and franchised stores. Franchisees operate stores under the Harvey Norman brand name, which allows the company to expand its presence across various regions and countries. This model enables local entrepreneurs to run their businesses while benefiting from the established brand and support network.

International Presence: While initially founded in Australia, Harvey Norman has expanded its operations beyond its home country. The company has stores in countries such as New Zealand, Ireland, Singapore, Malaysia, and many more, making it a global player in the retail industry.

Customer Experience: Harvey Norman focuses on providing a comprehensive retail experience to its customers. This includes offering a wide product selection, competitive pricing, in-store and online shopping options, as well as services like product delivery, installation, and after-sales support.

Importance of Technology: The company places a significant emphasis on technology products, and its stores often feature dedicated sections for electronics, computers, and gadgets. This reflects the growing influence of technology in consumers’ lives.

Innovation and Adaptation: As with any retail business, Harvey Norman has needed to adapt to changes in consumer preferences and technological advancements. This includes embracing e-commerce and digital channels to meet the evolving needs of modern shoppers.

Most of the decline on the following key fundamental metrics have already been priced in in FY23 share price action and the big question here is how can Harvey Norman have decline revenue and NPAT but still increase its cashflow? Unlike other retail players Harvey Norman also gets income from its property portfolios, which represents a net asset of $4.4Bn and while most investors and traders are focus on the underlying business result, they very little weight on the size of the asset.

🚩 Revenue for the Year at $9.193B

🚩 $539.52M – Reported NPAT (Net profit after tax) & NCI (Non-Controlling Interest), down by 33% PCP, but still holding 4-YEAR CAGR of 7.6%.

🚩 Dividend of $25c fully franked, a material decline of 33%

✅ Operating Cash flow 13% up YoY to $680.26m, an 4-YEAR CAGR or 16.2%

✅ Net Assets growth of 4% YoY to $4.466B and 4-YEAR CAGR 8.7%, despite high interest rates environment.

The group operations can be divided in three categories and the property segment alone represents 23.3% of the overall group PBT , Overseas Company operations segment representing 21.2% and Franchising Segment representing 56.8% of the PBT.

We have separated all the short term positive and negative aspects that had triggered the sell off during FY23

Positive Aspects:

  • Increase Compared to FY19: The franchising operations segment result increased by $124.96 million, or 50.3%, from $248.40 million in FY19, with a 4-year CAGR of 10.7%. This indicates growth over the pre-pandemic levels.
  • Higher Rent and Outgoings: There was an offset by higher rent and outgoings received from franchisees, indicating that there has been an increase in these payments which could be positive for the franchising operations.
  • Investment in Customer Loyalty: The franchisor’s investment in enhancing customer loyalty and retention through bonus gift cards is mentioned. This could potentially lead to better customer relationships and higher customer retention rates.

Negative Aspects:

  • PBT Decrease in FY23: The PBT result in FY23 was $373.36 million, a decrease of $179.66 million or –32.5% from $553.02 million in FY22. This significant decline indicates a decrease in profitability.
  • Reduction in Revenues: Franchising operations segment revenues decreased by $127.50 million, or –10.7%, from $1.19 billion in FY22 to $1.07 billion in FY23. This reduction in revenues suggests a decline in the financial performance of the segment.
  • Margin Decrease: The franchising operations margin dropped from 8.19% in FY22 to 5.82% in FY23, representing a 237 basis points drop. This suggests a decline in the profitability relative to the revenue generated.
  • Impact of Macroeconomic Conditions: The text mentions an abrupt turnaround in macroeconomic conditions that worsened throughout FY23, affecting household budgets and consumer sentiment. This external factor had a negative impact on the business environment.
  • Cycling of Sales in 2H23: The result for 2H23 was a reduction of $124.45 million or –47.8% compared to 2H22. This decline is attributed to franchisees cycling record 2nd half sales in the prior period due to pent-up demand and deferral of purchases.
  • Rise in Costs: The costs to operate the franchising operations segment increased during the year, including the costs to monitor and evaluate franchisee compliance with their franchise agreement. This could potentially indicate increased operational challenges or regulatory compliance costs.
  • Rise in Finance Costs: Finance costs rose by $10.43 million primarily due to increased interest costs on lease liabilities for leases sub-leased to external tenants, which might indicate increased financial burdens.
  • Marketing Expenses: Although marketing expenses have normalized, they are still lower as a percentage of Australian franchisee sales revenue compared to pre-pandemic levels. This might indicate a challenge in effectively promoting the brands post-lockdowns.

Overall, the text presents a mixed picture with both positive and negative aspects impacting the franchising operations segment’s financial performance.

Outlook for FY24

  1. Store Expansion in Malaysia: The company has opened 2 new company-operated stores in Malaysia and plans to open 8 more in FY24, with an eventual goal of reaching 80 stores by the end of 2028. This indicates a strong commitment to growth in the Malaysian market.
  2. Continued Growth in New Zealand: While some store openings in New Zealand have been deferred due to the macroeconomic situation, the company remains committed to opening a new company-operated store in FY24. This indicates ongoing expansion efforts in the region.
  3. Expansion in Croatia: The company is pursuing retail sites in Croatia and intends to open 3 new stores there during FY25. This suggests an interest in entering new markets and expanding the store network.
  4. Premium Refit Program: The company has resumed its premium refit program, with several complexes undergoing premium refits to enhance the customer experience. Additional premium refits are planned for the upcoming years, demonstrating a commitment to improving existing stores.

Negative Outlook:

  1. Deferral of Store Openings: Due to the macroeconomic situation, some store openings in New Zealand have been deferred to the first half of FY25. Similarly, the opening of company-operated stores in Budapest, Hungary, has been delayed to FY25. These delays may indicate challenges related to market conditions or other factors.
  2. Relocation and Refits: While the relocation of a franchised complex in Australia is planned, there is no explicit positive statement about the success or advantages of this move. Additionally, although the premium refit program is mentioned, potential challenges or risks associated with these refits are not discussed.

Key Dates for FY24

Technical Analysis

If if you have held (ASX: HVN) for the last year, you would be breaking even as the stock has been moving in bearish direction, mostly as result of monetary tightening slowing down demand for its products. While underlying business is shrinking slowly, but property side has improved and it is important to remember that (ASX: HVN) is a stock that has double exposure – REIT and Retail, since Harvey Norman owns $4.4b in property.
The current share price shows a strong recover since July lows despite negative results. We believe the market could be pricing potential interest rates cut by 2024, lastly smart investors can see that Harvery Norman is trading at very low valuation, specially if we add back the REIT side of the business.

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