Harvey Norman: Crisis approaching?
Nathan Bell
March 12, 2012



Gerry Harvey has some problems to solve.    

A year ago, Intelligent Investor still had a positive recommendation on Harvey Norman.

But last July, after four quarters of negative same-store sales growth, it was time to admit something was wrong.   

Since then, the deterioration has accelerated. Same-store sales in Australia fell almost 10% in the second quarter, a decline reminiscent of an economic depression.


But the Australian economy isn't in recession.

As you'd expect with a sales decline of that magnitude, the 2012 first-half result was a shocker. There were several aspects of particular concern.   

First was the conference call itself.

Managing director Katie Page simply read off the presentation slides; analysts that managed to survive the conference call registration process were restricted to one question each; And few of the questions that were asked were adequately answered.

At a time when Harvey Norman needs to explain itself more fully, management seems to consider its reporting obligations an imposition.

Second, the whole “omni channel strategy” referred to in the presentation sounds more like a mission statement than a genuine change in direction.

The company is trying to catch up in the online space but this “strategy” looks like it was cooked up in half a day workshop as a response to analyst concerns.

As if to confirm it, barely three days later, Gerry Harvey announced he was unhappy with sales from the company's four-month old online site.   

Surely it's way too early to pass judgment? The threat from the Internet deserves more attention than this scatological approach.

Third, the franchising business in Australia has real problems, as the 10% sales decline indicates.

Consumer electronics franchisees are suffering due to savage price deflation in electronic consumables. 

Attracting and retaining good franchisees is crucial for any franchising business, but many must be re-thinking their commitment to the industry.

At any cost

At the results presentation, management explained the strategy within Australia was market share at all costs.

This means Harvey Norman will undercut competitors in an attempt to be “the last man standing”, as an associate put it. If that's true, it will be a painful process for all concerned.

Fourth, the company already has a full plate. Ireland is still bleeding, with a loss of $16 million in the first half. The company has been opening stores in Slovenia and Croatia but European economies aren't exactly buoyant.   

Asia is the one geographic bright spot, but should opening high-end furniture stores like Space in Singapore really be management's focus?

Then there are the property development activities (where the company is having some success). These are a great many balls to keep juggling.

Debt issues

Fifth, management has often talked about the company's conservative debt levels but with operating cash flow slumping 79% to $19 million in the first half, debt levels are rising.   

The net debt-to-equity ratio has risen from 25% to 30% over the past year and the company had to ask its bankers to increase its debt facilities over the past few months.

Harvey Norman's debt position will deteriorate further.

It's why management isn't comfortable with a share buyback that would release the more than $600 million of franking credits sitting within the company.

While the debt position might look acceptable now, management knows it will take significant resources to fight the war for market share. 

It all sounds rather grim. Harvey Norman has a huge property portfolio that will indeed help it become “the last man standing” but even with the property portfolio there are risks.

If retail tenants, including franchisees, start demanding rental reductions, then the company's property may not be worth the $2.1 billion valuation in the books.

Still, the share price is already factoring in a much worse scenario for profits because excluding property, the implied value for the entire business is a mere $700 million.

Despite the problems, the franchising business still produced a profit before tax of $96 million in the first half and the New Zealand business produced a profit of $21 million in the first half.

Companies in crisis need to do something. Billabong International, for example, ended up selling a half-share in its best brand, Nixon, which saved it from breaching banking covenants.

It's hard to see exactly what Harvey Norman can do, but do something it must. At the moment, it's floundering.   


Read more: http://www.theage.com.au/business/intelligent-investor/harvey-norman-crisis-approaching-20120312-1uu4h.html#ixzz1ostZA5hD

It appears what is happening to Harvey is what happened to the people he stomped over on his way to the top. What goes round comes round.

Doctor Jolly wrote on Mar 13^th, 2012 at 8:28am:


What happened, you get ripped off or something?

If I were Gerry I would cut profit margins for like 6 months and offer insane bargains..
He needs to gain some public support

bobbythefap1 wrote on Mar 13^th, 2012 at 9:51am:


Gerry said years ago that WOW was selling too cheap, and relying too much on volume sales.
As a consequence, each WOW store was a million in the red each year for years.
Gerry might eventually buy them out for a song.
However, I would suggest that Gerry will not be making the same mistake WOW made any time soon.
If some Harvey Norman stores are operating at a loss, we can expect to see those particular stores closed.

chicken_lipsforme wrote on Mar 13^th, 2012 at 10:16am:


My prediction is that all retailers which are publicly listed companies will eventually fold. There is just not enough profit margin to appease the share holders and landlords greed !!

Doctor Jolly wrote on Mar 13^th, 2012 at 10:36am:


You can buy those online as well and get them delivered etc If you know what model you are after then it is easy

Sir lastnail wrote on Mar 13^th, 2012 at 10:44am:


The problem Gerry has is that he employs drones as sales staff. Probably because he's too cheap to employee anyone who knows the products.
So you get absolutely no help from the sales staff if you venture into his store.  Which translates to that his "in store" experience is actually less informational than going online. Online usually has all technical information and reviews, or other sites have reviews which provide for more "sales" information.

So you need to ask yourself, why go to Harvey norman at all ?