Retailer Harvey Norman says its earnings for 2023 will be lower as sales retreat

Harvey Norman has warned slowing sales would trigger a sharp fall in profits this year as households cut costs amid interest rate rises.

Australia’s $400bn retail sector has been hit with further evidence of a spending slowdown with one of the nation’s heavyweights, Harvey Norman, warning slowing sales would trigger a sharp fall in profits this year as households cut costs amid interest rate rises.

Harvey Norman chairman and billionaire Gerry Harvey said on Wednesday the fast-paced string of rate rises pushed through by the Reserve Bank over the past year had finally caught up with shoppers, who were now visiting his stores less often, and buying slightly less when they did.

The consumer electronics, furniture, whitegoods and bedding retailer issued a trading update on Wednesday revealing that full-year earnings would be between $636.5m and $703.5m, against earnings in 2022 of $942.8m, a decline of as much as a third.

The Harvey Norman profit update coincided with the release of inflation figures for May that showed the RBA’s rate hikes had finally hit inflation as May CPI came in at a lower-than-expected 5.6 per cent, versus 6.1 per cent expected, and after hitting 6.8 per cent in April.

Harvey Norman said its net property revaluations for the 12 months to June 30 were expected to be about $119m.

Harvey Norman shares rose despite the cut to profit forecasts, closing up 4.9 per cent at $3.41.

Although no sales guidance was provided, Mr Harvey told The Australian the profit retreat was driven by shrinking store sales as consumers reacted to ele­vated mortgage bills and other cost-of-living pressures.

“Some stores, yes sales are down, other stores no, and so across the board, yes, there has been a weakening in sales and a weakening in foot traffic, but that is probably for every retailer,” Mr Harvey said.

The retail chief told The Australian the RBA’s rate rises since May last year were having an obvious effect on the consumer and their willingness to spend, but he remembered worse during the last recession in the early 1990s.

Gerry Harvey. Picture: Nigel Hallett

Harvey Norman is the latest retailer to unveil softening sales and earnings as shoppers rein in their discretionary spending to find savings in squeezed household budgets, with other retailers such as Domino’s Pizza, Treasury Wine Estates, fashion chain ­Universal Store, infant products group Baby Bunting, food and hamper business Maggie Beer Holdings and jeweller Michael Hill testifying to a deteriorating outlook.

Upmarket department store David Jones was revealed by The Australian to have hit a sales cliff in early June, just as the RBA had lifted official interest rates once again in the face of stubbornly high inflation, but the central bank’s focus has caused collateral damage for the retail sector.

Citi analyst Adrian Lemme said industry feedback had suggested a severe deterioration in some retail categories that sit under the Harvey Norman banner as mortgage stress spreads.

“Combined electrical and furniture ABS sales are down 5 per cent for the four months to April on the previous corresponding period,” Mr Lemme said.

“Our industry feedback suggests large appliances and furniture has weakened further through May and June, with conditions particularly tough in the areas where mortgage stress is most acute.”

Still, Mr Harvey said rate rises needed to be considered in a historical context.

“There is no question it is having an effect, but I have lived through higher interest rates. These are low in comparison. With interest rates there is no certainty they won’t go up another 1, 2, 3 per cent, and if that happens how will we go?

“We had interest rates at 10, 12, 13 per cent for years at one stage and we went OK then, and if you are going to have a recession you probably have got to have unemployment above 8 or 10 per cent.”

AMP deputy chief economist Diana Mousina said the lower than expected May inflation data could cause the RBA to pause its current round of rate rises, although pressures in the economy from recent wage increases could spoil that.

“Today’s inflation data gives the Reserve Bank room to pause hiking rates at its next meeting next Tuesday, but the high level of inflation and the RBA’s concern about increasing wages growth will keep the RBA hawkish and means that another one to two rate hikes are still likely over coming months,” Ms Mousina said.

There are many analysts, retailers, politicians – and home borrowers – who fear any further rate rises could tip the economy into a full-blown recession.

Mr Harvey said he rated the chances of a recession at about one in 10, with any bearish views of the economy tempered by the historically low unemployment rate.

“While you have unemployment levels where they are, how the hell do you have a recession? And if you do have a recession it will be like the one in New Zealand, not like a real recession,” he said.

Mr Harvey said the pandemic had thrown “everything out of kilter” and ruined the strong earnings momentum at Harvey Norman before 2020.

“It’s like a horse race. Your horse has got to have that momentum and then this bloody thing comes along called a pandemic and you close, then you’re open, and your sales go through the roof and then you have no sales and then all your staff and the people running your store are affected,” he said. “In a way, we have to now start again and start working back towards profit to $1bn before tax. That is where we are heading.”

Some analysts think second-half profits for Harvey Norman could fall by 40-45 per cent, based on the trading update.

E&P analyst Phillip Kimber said consumer spending would be challenging over the next 12-18 months, “in particular for those segments that materially benefited through the Covid period”.

“The exact timing of the impact from slowing consumer on discretionary retailer earnings has been difficult to forecast to date. It appears to now be hitting for many discretionary retailers post March/April,” Mr Kimber said.

Mr Lemme said despite earnings momentum being weak, he believed there was strong valuation support for Harvey Norman given an NTA of $3.54 a share backed by its $3.4bn investment portfolio.