Harvey Norman posts 16pc slide in full-year profit

Harvey Norman announces capital raising as stronger sales are offset by a property slowdown, failed dairy venture.

A woman looking at TVs in Harvey Norman. Pic: Liam Kidston.

Furniture, bedding and consumer electronics retailer Harvey Norman has suffered a 16 per cent fall in full-year net profit to $380.05 million despite stronger sales for its stores as the housing boom and a growing population bolster its performance.

The fall in profitability has been driven by slowing values for its swollen property portfolio and more than $90m in losses and impairments linked to its failed dairy venture.

Harvey Norman has also acted to repair its balance sheet and pay down debt, launching a renounceable pro rata entitlement offer of new fully-paid shares to raise $163.85m with an offer price of $2.50 per share — a steep discount to a closing price yesterday of $3.77.

Harvey Norman (HVN) shares initially fell as much as 8 per cent to a two-week low of $3.47 before recovering to be down just over 2 per cent at $3.67.

Harvey Norman said net profit before tax was down 17.1 per cent to $530.17m and underlying net profit — excluding the losses and impairments for its Coomboona dairy joint venture — fell 0.96 per cent to $532.54m.

The retailer, controlled by billionaire businessman and retailer Gerry Harvey, said it had delivered the second highest underlying profit in the company’s history.

Harvey Norman declared a final dividend of 18 cents per share, up from 12 cents per share paid for the same time last year. The final dividend will be paid on November 2.

Sales for the period were up 8.8 per cent to $1.993bn. The aggregated sales from all its company-owned and franchise stores in Australia, New Zealand and its international operations totalled $7.58 billion, up 4.3 per cent. Like-for-like sales across all its stores, domestic and international, rose 3.1 per cent.

Comparable store sales for Harvey Norman’s flagship Australian operations rose 2.2 per cent and were up 23.8 per cent in Slovenia and Croatia, up 10.9 per cent in Ireland and 9.4 per cent better in Singapore.

However, the failed investment in a Victorian dairy business and lower valuations for its property portfolio savaged the retailer’s balance sheet.

Harvey Norman said its profit for fiscal 2018 was negatively impacted by a reduction in the net property revaluation increment by over $56m, from $108.05m for the 2017 financial year to $51.65m for the 2018 financial year.

In addition there was first-time recognition of impairment losses totalling $49.44m relating to the dairy joint venture.

In December Harvey Norman’s accounts recognised an impairment loss of $20.67m. In June 2018 the company assessed the recoverability of the loans advanced to the dairy business and recognised an impairment loss of $28.78m.

Harvey Norman said the performance of its overseas Harvey Norman stores had been “outstanding” in fiscal 2018 and this segment now represented 22 per cent of the retailer’s total consolidated profit before tax result.

“Each offshore region has delivered their best trading result and highest profitability, both individually and in aggregate, since launching overseas,’’ the company said.

Katie Page and Gerry Harvey at Magic Millions Race day on the Gold Coast. Pic: Adam Head

Mr Harvey said he was pleased with the company’s performance in 2018.

“From humble beginnings when we introduced the Harvey Norman brand to overseas markets in 1997, the Harvey Norman brand has grown to become a strong global player with solid results achieved by the 89 company-operated stores across seven countries,’’ he said.

Mr Harvey said the company would explore new opportunities in South East Asia and could open up to 18 new stores overseas within the next two years.

He said the retailer’s strong property portfolio valued at $2.86bn was the “driving point of difference and competitive advantage in the Australian market”.

In Australia, he said local stores performed well despite having to meet competitive market pricing pressures, which accelerated in the last six months of fiscal 2018.

The surprise capital raising and renounceable rights issue is priced at a steep discount to the company’s current share price and was expected to push down on the stock.

The raised funds will be used to pay down debt, with the 2018 accounts showing total interest-bearing loans and borrowings of $503m, up from $333.85m in 2017.

The entitlement offer, to raise $163.85m, is being done through a one for every 17 shares rights offer at $2.50 and represents a massive 33 per cent discount to the closing share price of $3.77 when the shares closed for trade on Thursday.

Mr Harvey, who is chairman of Harvey Norman, and his wife Katie Page who is managing director, as well as other Harvey Norman directors, have indicated they will take up their full rights in the offer.