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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.

    Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169

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