Harvey Norman share price sinks 10% on earnings miss and big dividend cut

Times are getting tougher for this retail giant due to the cost of living crisis…

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Key points

  • Harvey Norman shares are falling after the release of its half-year results
  • The retail giant posted a decline in profits and cut its dividend
  • The second half has started softly with sales down 10% in Australia

The Harvey Norman Holdings Limited (ASX: HVN) share price is being sold off on Tuesday.

In morning trade, the retail giant's shares are down almost 10% to $3.76.

This follows the release of a half-year result that appears to have fallen short of expectations.

Harvey Norman share price falls on earnings miss

  • Consolidated revenue flat at $2.34 billion
  • Earnings before interest, tax, depreciation and amortisation (EBITDA) down 8% to $694.01 million
  • Reported profit after tax down 15.1% to $365.9 million
  • Underlying profit after tax down 14.5% to $291.09 million
  • Fully franked interim dividend down 35% to 13 cents per share

What happened during the half?

For the six months ended 31 December, Harvey Norman reported flat consolidated revenue of $2.34 billion.

Unfortunately, the retailer's profits didn't hold up as well as its revenue. This was due to the company's margins easing, leading to its EBITDA falling 8% and its underlying profit dropping 14.5%.

In light of this profit decline, the company has elected to slash its interim dividend by 35% to a fully franked 13 cents per share.

How does this compare to expectations?

According to a note out of Goldman Sachs, its analysts were expecting group sales of $2.28 billion, EBITDA of $588 million, and underlying profit after tax of $311 million.

This appears to indicate that Harvey Norman beat on the top line and with its EBITDA, but missed on the bottom line.

In addition, while no dividend estimate was provided for the first-half, Goldman was expecting Harvey Norman's full-year dividend to increase by one cent to 39 cents in FY 2023.

Given the large cut it has made to its interim dividend, this appears to indicate that there's very little chance of that happening anymore. This could be putting added pressure on the Harvey Norman share price.

Management commentary

Harvey Norman's Chairman, Gerry Harvey, commented:

Our Omni Channel Strategy continues to deliver stable returns and sustainable growth resulting in a significant uplift in consolidated net assets by $1.18 billion from pre-COVID levels of $3.28 billion as at 31 December 2019 (1H20) to $4.46 billion as at 31 December 2022 (1H23).

Our balance sheet is robust, anchored by a strong, tangible property portfolio totalling $3.94 billion that continues to deliver growth in terms of rental returns and capital appreciation. We have sufficient liquidity and we continue to maintain a low net debt to equity ratio of 12.17% giving us the capacity to access additional liquidity should we require it. Amid the macroeconomic headwinds of the past year, we have grown our integrated retail, franchise, property and digital business across eight countries to nearly $5 billion in system sales for the current half-year period.

Outlook

Management advised that the second half has started softly, with Australian franchise sales falling 10.2% during January.

And while it acknowledges the challenging economic environment, it remains optimistic. It said:

The consolidated entity is confident in the resilience of its integrated retail, franchise, property and digital system and in its continued ability to deliver stable returns and sustainable growth for its stakeholders. Despite the macroeconomic headwinds and cost of living pressures affecting discretionary retail, our strong balance sheet and our substantial growth in net assets throughout the pandemic has left us in a solid position to withstand these challenging circumstances.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman. The Motley Fool Australia has positions in and has recommended Harvey Norman. 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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