Harvey Norman hammered over profit slump

The retailer suffered the biggest drop among Australia top 200 companies. Photo/File.

Investors have punished Harvey Norman, wiping AU$635 million (NZ$679 million) from the retailer's market value after its first-half profit slumped 19 per cent under the pressure of higher costs and a diminished contribution from its huge property portfolio.

Harvey Norman suffered the biggest fall among Australia's 200 biggest companies on Wednesday, tumbling 12.5 per cent to a three-month low of $4.01.

The furniture and electrical goods merchant's net profit for the six months to December 31 was down 19.3 per cent on the previous half to AU$207.7 million.

Sales at the company's Australian franchise network rose 4.8 per cent to AU$3 billion for the six months to December 31, or 4.1 per cent in like-for-like terms.

But franchise network profit was down 2.9 per cent to $167.2 million due to increased competition and higher wages costs and the company flagged a weak start to the year, with January and February like-for-like sales growth at 0.2 per cent.

Sales at the company's directly owned stores in Europe, Asia and New Zealand rose 4.7 per cent to $1.02 billion and pre-tax profit was up 11 per cent to AU$57.4 million.

The result was also affected by a drastically smaller contribution from the increase in the value of Harvey Norman's property holdings, down from AU$75.7 million at the 2015/16 half to AU$22.8 million.

Further weighing on the bottom line was a AU$20.7 million impairment on the group's Coomboona Holdings Victorian dairy farm investment - a stake bought in 2015 on Harvey Norman chairman Gerry Harvey's recommendation.

Mr Harvey on Wednesday described the result as solid and said he was not concerned by the negative impact of the property and dairy farm valuations.

Speaking to pay TV channel Sky News, Mr Harvey said the property portfolio was "fantastic" and it was normal for values to change every six months.

"In one six months it might be up AU$5, AU$10 or AU$20 million and the next up AU$30 or AU$40 million," Mr Harvey told Sky.

"That's been going on year after year ever since the GFC finished and when the GFC was on we devalued a lot of those properties."

Mr Harvey said the company's Australian franchisees performed solidly during the half despite an increase in price competition and given they were up against record sales in the prior year's first half.

Excluding the dairy impairment and net property revaluations, Harvey Norman's underlying group profit was down 1.4 per cent at AU$209.4 million.

Investment bank Citi's analysts Bryan Raymond and Craig Woolford have maintained a sell rating on Harvey Norman, with a target price of AU$3.50.

In a note the analysts said the competitive environment for Harvey Norman was deteriorating and the 12 cent interim dividend was less than an expected 15 cents

JB Hi-Fi and its white goods arm The Good Guys have upped price pressure on Harvey Norman, while Amazon is also building its local presence, the Citi team said.

"New competitors are opening stores rapidly and attempting to take share from Harvey Norman," they said.

"Many of these competitors are high-volume, low-margin retailers such as Amazon."

Harvey Norman half-year profit slump:

• Net profit down 19.3pct to AU$207.7m
• Company-operated sales revenue up 4.7pct to AU$1.02bn
• Australian franchise sales revenue up 4.8pct to AU$3bn
• Interim dividend 12 cents a share, down from 14 cents