Harvey Norman Holdings Limited (ASX: HVN) shareholders have been left to lick their wounds after a scathing past 12 months for the ASX retail share. Succumbing to the waning demand, the Harvey Norman share price is now 27.8% lower than a year ago — fetching $3.70 apiece.
Shares in the 40-year-old multinational retailer are struggling to find support amid dwindling profits and slowing sales. Yet, the company's co-founder and chair, Gerry Harvey, has been scooping up Harvey Norman shares to the tune of more than $80 million worth throughout March.
It all begs the question: should we add this ASX 200 retail share to our shopping cart?
All eyes on interest rates
An uncertain half ahead was a common theme among retailers during the February earnings season.
The strength of businesses, such as Harvey Norman, fundamentally comes down to the confidence and health of the average household budget. Hence, you can begin to imagine the ramifications of the current rate-rising environment.
After 10 consecutive interest rate hikes by the Reserve Bank of Australia, the tightening appears to be having its intended effect.
Data released by Commbank last month showed a 9.8% decline in retail spending intentions for February compared to the prior month. Similarly, the Australian Bureau of Statistics recently presented the slowest year-on-year growth in retail trade since December 2021.
These subdued spending habits were evident in Harvey Norman's weak total system sales for the first half of FY2023. The top line figure was an underwhelming 1.4% above the prior corresponding period. Meanwhile, reported net profit after tax (NPAT) and non-controlling interests declined 15.1% to $365.9 million.
There's a good chance investors are remaining cautious around ASX retail shares as the 'mortgage cliff' is expected to be coming up around June. If a substantial spending crunch is to occur, this will probably be its onset.
Retailers are likely first in line to get chopped from the budget as financial distress materialises, according to global consulting firm McKinsey & Company. In turn, many former Harvey Norman shareholders have decided not to stick around to find out how bad it could get.
Would I buy this ASX retail share?
The economic outlook is certainly hazy — and there's no telling if we've seen the last of the rate hikes — but I'm inclined to be somewhat quietly optimistic on the Harvey Norman share price.
Personally, I tend to believe we're close to peak tightening. Sure, rates could remain higher for longer than we'd prefer, but will that cause the devastation that is currently being priced in? I'm not so convinced.
Currently, analyst estimates suggest a bottoming in Harvey Norman's earnings in FY2024 at around $425 million, as shown above.
At today's market capitalisation, that would calculate out to be a price-to-earnings (P/E) ratio of nearly 11 times. Hardly expensive in my view when the global retail industry average earnings multiple is around 17 times.
Furthermore, the ASX 200 retail share hasn't traded on an earnings multiple this low since the Global Financial Crisis, depicted in the chart above.
Back then, the company had a debt-to-equity ratio of approximately 29%. Today, the balance sheet is stronger with that same ratio now around 20%.
As such, I personally believe there could be a strong upside to the Harvey Norman share price from here.
