Harvey Norman Earnings: Another Difficult Year Ahead, but Earnings Growth To Return

No-moat Harvey Norman’s HVN fiscal 2023 underlying profit of AUD 680 million—before tax and excluding net property valuations—was marginally better than the AUD 670 million midpoint of the guidance range from late June 2023. Although global sales and operating profits in fiscal 2023 broadly met our expectations, soft trading in July 2023 drives our near-term earnings downgrade. Second-half fiscal 2023 sales declined 12% in the core Australian franchising operations versus the previous corresponding period. In July 2023, Australian franchisees saw weak demand for electronics and home appliances with demand normalising after the coronavirus pandemic, exacerbated by cost-of-living pressures. We reduce our fiscal 2024 EPS estimate by 6% to AUD 0.33 per share.

However, we expect a strong rebound from cyclically depressed demand levels in fiscal 2025 and our longer-term sales estimates are unchanged. Lower fiscal 2024 earnings are offset by the time value of money and we maintain our fair value estimate of AUD 3.90 per share. Shares screen as fairly valued, appropriately reflecting Harvey Norman’s near-term challenges and the longer-term earnings growth outlook.

The board declared a fully franked final dividend of AUD 12 cents per share bringing the full-year dividend to AUD 25 cents, down 33% from fiscal 2022. The dividend represents a payout ratio of 66% of underlying fiscal 2023 EPS, yielding 6% at the current price. The balance sheet is solid, with over AUD 4.1 billion in freehold property assets compared with AUD 0.6 billion in net debt.

Harvey Norman underperformed JB Hi-Fi in Australia and New Zealand in fiscal 2023. While sales generated by Harvey Norman’s Australian franchisees declined by 5% in fiscal 2023, JB Hi-Fi grew its Australian sales—including The Good Guys—by 4%.