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“Stuck in the middle” with Harvey Norman
Harvey Norman Holdings Limited (ASX: HVN) has released a trading update for the first five months of FY22 with profit before tax (PBT) down 35.5%.
After initially falling more heavily, the Harvey Norman share price is down just 0.19% to $5.18.
HVN share price
Stuck in the middle
Key results for the period from 1 July 2021 to 21 November 2021 include:
- Total sales down 8.8% and same-store sales fell 9.6% on FY21
- Total sales up 16.9% and same-store sales 15.4% higher on FY20, which was before the pandemic hit
- PBT of $217.4 million, down 35.5% on FY21, but up 70.1% on FY20
In summary, Harvey Norman is outperforming its pre-pandemic numbers but is underperforming relative to last year.
The prior year numbers were always going to be difficult to match or exceed, given it was the result of unprecedented household spending.
Add in lockdowns across Auckland, Victoria, New South Wales and Malaysia and the fact it’s only a single-digit decline is a positive outcome.
Countries with fewer restrictions such as Singapore, Northern Ireland, Ireland, Slovenia and Croatia all reported positive sales growth.
This infers that when trading conditions return to normal, customer demand for household items remain resilient.
Management provided no further guidance for the remainder of FY22.
How do I value Harvey Norman shares?
Valuation is more of an art than science. But a simple way we can get an estimate of profit is using the PBT figure provided today.
For the first four and half months, Harvey Norman recorded $217 million in PBT. Over a full year, this becomes about $570 million.
With a market capitalisation of $6.3 billion, Harvey Norman is trading on a price-to-earnings multiple of 11.
This valuation is not onerous by any stretch. Nonetheless, it will face an uphill battle to retain customers as travel returns.
My take
Essentially, Harvey Norman is stuck in the middle.
In FY21, it benefitted from abnormal demand during FY21 as households migrated travel budgets towards household spending.
Now that spending is reducing in FY22, at face value it looks like the retailer is going backwards. Realistically, it’s just applying a little pressure to the brake, rather than reversing.
Nevertheless, I don’t like investing in companies with headwinds, short or near term. Therefore, I’ll be passing on Harvey Norman for now.
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