Stock Pitch

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Company Overview
Harvey Norman is an Australian-based retail chain with 230 stores in Australia, New Zealand, Slovenia, Ireland, Northern Ireland, Malaysia, Croatia and Singapore, offering a huge range of electrical, computer, furniture and bedding goods. It is effectively a franchisor of other Australian retail chains including Domayne, Space Furniture, Ariston Appliances and Joyce Mayne.

Financial Summary (Annual report for the year ended June 30, 2012) Favorable change
A 5-year track record of positive earnings
Retained earnings to total assets up 4.3% to 49.5%

One main reason for favorable change in Harvey Norman is Australian consumer confidence has recovered from 52-week’s low 95 to new 52-week’s high point at 110.54 by Westpac, which means there are more optimists for Harvey Norman’s share price.

Unfavorable change
Total revenue down 7.8% to $A2.5b
Net profit after tax slumps 31.6% to $A172.5m
EBIT Margin down 26.5% to 19.7%
Net Debt/EBITDA(x) from 1.1 to 1.8
Debt to equity up 16.7% to 0.4
Department store sector fell 0.1% in terms in Feb 2013 while the other retail sector rose 0.4% (released from ABS in Apr 4 2013)

One main reason for unfavorable changes in Harvey Norman is Australian electrical goods sales struggled over the past year as the strength of the Australian’s dollar pushed down selling prices of imported products while the consumer’s demand is weak.

Macro Factor
Although the global growth in the foreseeable future is likely to be slower due to European potential recession after the debt crisis and Asian lower GDP growth rate, the risk in downward side is reducing and the IMF monetary policy and interventions begin to work. Additionally, American economy begins to recovery and the growth in China has stabilized. Those signs implicate market is going to take a turnover which will have positive impact on Harvey Norman’s share price.

From Australian perspective, according to RBA report in 2 Apr 2013, the exchange rate is considered to be higher than expected which implicates further interest cut is predictable. Harvey Norman has been underpriced in recent years because of the sluggish consuming market. After RBA cut interest rate last year, its share price has gone up for about 54%. Based on the macro-factors, it could go further next year but it might close the gap before more good news is released.

Micro Factor
There are two significant strategies provided by Harvey Norman business model which are offering diversity product and owning real property assets.

There is no doubt that the strategy of diversified product help Harvey Norman meet consumers’ demand of the wide range of particulate product by becoming category killers with AV/IT and home appliances, furniture and bedding. Clearly, in the New Retail era it is the consumer that holds the power and not the retailer. This growing power has created consumers who are savvy and well-informed and focus on service rather than discount price. When consumers are deserting the department stores in the furniture, electrical and computing areas, Harvey Norman indeed provide the good range of merchandise to them.

When it comes to Harvey Norman property segment, it is clear to see the existence of property portfolio gives franchisees access to high-quality premises. In addition, property ownership delivers a steady and reliable income stream in an uncertain retail climate by charging rent fees from franchisees and complementary third-party tenants. Specifically, the result before tax generated by Harvey Norman property segments represents 40.8% of consolidated profit before tax for the half-year ended 31 December 2012 (the impact of the net property revaluation decrement for the period is excluded).

Upside Catalyst
Exclusive rights
Harvey Norman will use their efforts on obtaining grants to receive the newest technology and in some cases receive it exclusively and neo consumers will pay a premium price for the highest...
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