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Harvey Norman unveils FY19 earnings growth and a $174m cap raise

The Harvey Norman Holdings Limited (ASX: HVN) share price gave up early gains after launching a capital raise along with its full year profit results.

The HVN share price initially jumped over 1% on the news before slipping 1.7% to $4.59 even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 0.7% on optimism that China and the US are looking to restart talks to deescalate the trade war.

But it isn’t only Harvey Norman that’s weighing on the consumer discretionary sector. The Wesfarmers Ltd (ASX: WES) share price also fell 1.7% to $38.66 although the rival JB Hi-Fi Limited (ASX: JBH) share price rallied 0.9% to $32.76.

Overseas expansion fuelling growth

Harvey Norman launched a renounceable entitlement offer with the aim of raising $173.49 million by selling new shares at $2.50 a pop to reduce its corporate debt burden. That’s a big discount to the current share price.

The homeware and electrical retailer also unveiled a 7.2% increase in FY19 net profit to $402.3 million and a 23.5% uplift to its final dividend of 21 cents a share.

Harvey Norman’s overseas expansion is also paying off with revenue from this division jumping 9.7% to a record $2.05 billion as its flagship stores in Malaysia, Singapore, Slovenia and Ireland increased market share.

Banking on international sales

Pre-tax profit growth for its international business is outpacing its local operations at 9.7% vs. 8.4%. The offshore business accounts for 23% of group pre-tax profit.

Harvey Norman is looking overseas to fuel its growth and intends to expand its international footprint to 111 company-operated stores across seven countries by end of FY21. That’s an increase of 21 stores and 17 of them will be in Malaysia and Singapore.

Growing overseas makes sense as there isn’t much space to grow in Australia – particularly when up against the likes of JB Hi-Fi.

This is a good result in a tough market – as long as you aren’t a Harvey Norman franchisee. Sales from non-company owned stores fell 1.8% to $5.66 billion as I believe small business owners don’t have access to the same resources to stay ahead in a challenging market that’s marred by online competition, a waning residential market and weak wages growth.

Early signs of turnaround in the Australian business

However, there may be light at the end of the tunnel. Harvey Norman noted that franchisee sales since the start of the current financial year has increased by 3.3% over the same period last year and 3% on a comparable sales basis.

The group is also seeing good growth in New Zealand, , Slovenia, Croatia, Ireland and Northern Ireland.

“For new stores and existing store refits going forward in the 8 countries, we will be taking the best elements of the Flagship fit out and design to integrate into these stores,” said the company in its earnings announcement.

“We plan to start rolling this format out in Australia and New Zealand, as new franchised complex and store refits become due.”

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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