Well it looks like the Barometer of Bogans, the Deliverer of Discounts, Harvey Norman (HVN) has underwhelmed again. As earnings season dies down (only Woolworths really left to report), the big box retailer has disappointed the market, again, with a stumble.
Sales were down over 6% across the board, accelerating strongly in the Sept-Dec quarter last year. Although this could be contributed to the closure of Clive Peeters stores, the structural trend in lower consumer spending – with a peripheral rise in online retailing (once called a waste of time according to chairman Gerry Harvey) is pinching.
HVN again proves its more of a property company than a retailer, highlighting the value of the underlying commercial property on its balance sheet as its “strength” with an increasing proportion of its profits arising from revaluations of the book.
Shareholders might be left wondering that clinging to an old-school bricks and mortar approach may not be a strength at all. Relying upon increasing value of commercial property reduces Return on Equity for shareholders (indeed return on assets has halved in the decade to just over 3%) and doesn’t provide any economic intangible leverage unlike other businesses.
In my opinion, investors should prefer companies with the ability to generate profits from the smallest equity base possible, not depreciating buildings and high capital expenditure.
Headline profit was down by only 2%, because of a near 50% reduction in tax, not the underlying profit change, down nearly 18% which also reflects the operating cash-flow of the business.
The outlook provided wasn’t overwhelming. Growth in Slovenia and Croatia isn’t exactly going to get shareholders excited Gerry, neither will a new centre in Maroochydore (just around the corner from me) since retailing centres are in oversupply on the ground, just like housing on the Sunshine Coast, where the bubble has arguably burst.
Maybe like Qantas, HVN would be better off selling its retailing business and keeping its property portfolio?
And maybe invest in a better marketing department. Not just the ad’s, but that investor presentation was woeful. Maybe the market agrees with me (there’s always a first) as the share price has fallen 4%, nipping below $2 a share for a moment today. Here is the medium term chart:
