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Stockwatch: Harvey Norman Holdings Ltd (HVN)

November 16th, 2009 · Greg Atkinson · 5 Comments

Harvey Norman is a retailer of household electrical appliances, personal computers and furniture & fittings with stores in Australia, New
Zealand, Slovenia, Ireland, Singapore and Malaysia. The company started with the opening of a single store in 1982 and was listed on the Australian stock exchange in 1987.

Since listing on the ASX, the company has grown rapidly and now trades under three brands names: Harvey Norman, Domayne & Joyce Mayne. One of the founders of the company, Gerry Harvey, is a household name in Australia and has been a successful businessman for over 40 years since opening his first store with Ian Norman back in 1961. When it comes the retailing of household furniture & appliances in Australia, few people can match the skills and knowledge of Gerry Harvey.

Today Harvey Norman Holdings Ltd. (ASX:HVN)  has 195 franchised operations in Australia, 69 company owned stores in offshore markets and a market capitalisation (as of 30 June 09) of $3.51 billion. (See HVN company profile for further information)

In addition to being a leading retailer, the company also owns an extensive property portfolio which according to the 2009 annual report is valued at $1.82 billion. A few years ago the ownership of a commercial property portfolio would not have raised too many concerns, however these days these assets are seen as being much riskier and investors need to be aware that Harvey Norman Holdings is not simply just a retailer.

Although Gerry Harvey and his management team are very experienced, not everything they touch turns to gold and the decision in February 2009 to close all OFIS outlets is the result of a failed strategy to enter the stationary/home office products market in Australia.

In addition the company’s expansion outside Australia and New Zealand has yet to prove entirely successful with operations in Ireland reporting a trading loss of $49.33 million in the year ending 30th June 2009.

There is a lot to like about Harvey Norman as a company. It is a well managed company, owns a number of well known brands in Australia, has been a solid performer for many years and despite the global economic downturn it still delivered a healthy profit from continuing operations  of $214.35 million in FY2009.

But although the company is growing in terms of outlets it’s profits are not. In FY2007 the company’s profit after tax was $324.10 million, it then climbed to $358.45 million in 2008 bu in FY2009  profits slumped to $214.35 million.

Also of concern is that a number of key financial measures are trending in the wrong direction for my liking. For example HVN’s ROE (Return on Equity) has slipped from just over 20% in 2000 to around 12.5% as of the June 2009 and this makes me wonder if the company’s growth has been just a little too aggressive.

Of course the global economic downturn has adversely impacted earnings, however luckily for  HVN  it generates the bulk of it’s revenue in Australia where the economic downturn has been less severe. In addition it has benefited from the government’s economic stimulus package and much of the money splashed out to taxpayers in late 2008 ended up in the cash registers at Harvey Norman stores.

Despite this, the company’s share price slumped from a peak of just over $7 in late 2007 to around $2 in early 2009 as the stock market bottomed out. At present HVN shares are rising pretty much in sync with the rally across the All Ords/ASX 200 and are likely to follow the overall market trend for the next few months or so.

Harvey Norman Holdings Ltd (ASX:HVN) 4 year stock chart

hvn-4-year-stock-price-chart-nov-09

HVN is a good example of a cyclical type stock in that it’s price moves in cycles depending on the prevailing business conditions. When times are good and people are spending the company’s stock price should do well, but when economic conditions deteriorate and profits fall then this tends to drag the stock lower.

Harvey Norman vs ASX All ordinaries 10 year chart

hvn-vs-all-ordinaries-10-year-chart-nov-09

Looking at the stock price of a company over a relatively long term, say 10 years, can be a good way to get a feel for how a stock performs during various business cycles. However when looking at HVN 10 year chart above we need to remember that the company has changed considerably over this period.

The most significant change in recent years has been the push by the company into offshore markets so although HVN’s earnings are still largely influenced by economic conditions in Australia, it also now has significant exposure to overseas markets. For this reason I suspect HVN will under-perform the ASX All Ords over the next year or so, maybe even longer mainly due to the drag operations in Ireland are likely to have on the company for the next few years.

But one could also argue that HVN’s expansion into overseas markets will boost company profits as the global economy recovers and therefore there should be plenty of upside potential in the stock at current prices. For some investors who wish to gain  exposure to retailing in Europe, Asia and New Zealand, HVN might be an interesting stock to look at.

Please remember that these “Stockwatch” articles are not a recommendation to buy, hold or sell any stock or investment. I urge all investors to do plenty of their own research and seek professional investment advice as required.

Disclosure: The author of this article does not own  shares in Harvey Norman Holdings Ltd. (HVN)


5 responses so far ↓

  • 1 Anon // Nov 17, 2009 at 4:41 pm

    Thanks for the Analysis Greg. I didn’t really know much about Harvey so you’ve filled in some of my missing knowledge.

    Did you see Warrens latest 13f filing? He’s almost doubled his stake in Walmart.
    I’m trying to understand this purchase. Divdends have grown, eps grown and shares on issue have decreased in the last 10 years. ROE 20-22% over the years. Looks pretty good. Meanwhile the shareprice is where it was in the late 90’s. Net Debt to net profit ratio pretty low.
    Soros is also increasing his holdings in Walmart. Something is clearly going on here.
    Did we all get on Silver? Thats the mispricing of the century in comparison to gold ! New highs and bluesky ahoy 😉
    Oh i’ve added to my USD position again.
    Some new US equity positions: OSG (Shipping), TPC (Construction)
    Some Japanese equity positions on my watchlist: NTT Docomo and KDDI Corp.

    Above not advice, please seek a financial advisor for financial advice. Do you own research 🙂

  • 2 Greg Atkinson // Nov 18, 2009 at 9:17 pm

    Anon, yes I saw what Buffet and Soros have been up to…mind you they are able to hide some trades if they are works in progress so they might be up to more than we know. Looks like they feel the market has been trading around a long term bottom…they are probably right. (who would bet against them?)

    I did not jump on silver (or gold), I just hold diversified miners. I simply don’t have the knowledge to be a commodities guy. Sounds like you did well though!

    NTT and KDDI are interesting stocks….I also like Toshiba and some of the Japanese mega banks.

    I am sort of out of the loop when it comes to U.S. stocks sorry, although I do watch Walmart, Cisco and McDonalds.

  • 3 Greg Atkinson // Feb 26, 2010 at 2:04 pm

    Looks like Harvey Norman and the retailers are doing it tough and I suspect this year will not be very kind to them either. http://www.theaustralian.com.au/business/news/discounts-are-sending-retailers-broke-says-gerry-harvey/story-e6frg90f-1225834833789

  • 4 Greg Atkinson // Oct 4, 2010 at 8:49 am

    Update: Seems Harvey Norman’s move into Ireland continue to put a drag on profits: Irish eyes aren’t smiling on Harvey Norman

    According to the SMH article above:

    “Harvey Norman’s 16 stores in the Republic of Ireland and Northern Ireland lost $42.6 million last financial year, weighing heavily on the company’s overall net profit of $231 million. Its Irish operations have only turned an annual profit once since it began trading in 2003.”

    Ouch!

  • 5 Greg Atkinson // Aug 30, 2013 at 10:57 am

    Update August 2013: Harvey Norman profit down 17.5%. From The Australian today:

    “ELECTRICAL and homewares retailer Harvey Norman’s full year profit has fallen 17.5 per cent amid dwindling sales across its Australian and European businesses.

    Harvey Norman made a net profit of $142 million down from $172 million the previous year.

    The result was affected by a $41 million writedown in the value of the company’s properties.

    Globally, sales were down three per cent during the year, with most of the decline in its Northern Ireland business where total sales were almost halved.

    Australian sales were down 4.2 per cent during the year, while sales in Slovenia and Croatia were down 4.6 per cent and Ireland was down 1.2 per cent.”

    Current stock price: $2.94

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