The Harvey Norman Holdings Limited (ASX: HVN) share price fell 13% to $3.98 following the publication of its half year results this morning. Here's what you need to know:
- Company store revenues grew 5% to $1,022 million
- Net profit after tax fell 19% to $208 million
- Underlying profit after tax rose 1% to $209 million
- Earnings per share fell 19% to 18.65 cents per share
- Dividends of 12 cents per share were declared
- Outlook for continuing to invest in flagship stores in Zagreb, Auburn, and Wairau Park
- Will open 2 new stores in second half (West Australia & Malaysia)
- Franchisee store sales are up 0.2% in the first two months of this year
So what?
Reported results were a lot weaker this year as Harvey Norman experienced losses in its joint ventures as well as less property revaluation than occurred in the previous year. Harvey Norman properties gained $75 million in value in the first half last year, but only $53 million in this half, which resulted in lower reported profits.
The company also took losses on its Coomboona Joint Venture (JV), which is the dairy farm that Harvey Norman invested in. The JV took $21 million in impairment losses (the valuation of this business fell) and lost $4.5 million in operating losses. We criticised the move into dairy here and here and it seems we were right to do so. Given the boom in Australian dairy recently however, it is possible that these losses may reverse in time.
Now what?
Harvey Norman has a bit of a reputation for being treated like the private investment vehicle of its founder/owner, as the forays into dairy farming and mining camp accommodation show. You really have to trust that management can build value in their forays outside retail, and so far they haven't.
Harvey Norman has a decent core business and a lot of valuable property. Competition from online and Amazon notwithstanding, I think the company will be around for many years yet. However, I would have to mentally discount my valuation of it because of management's forays outside retail, and because competition is intensifying.
As a result, while I think the company is interesting, I'm not a buyer today.
