Harvey Norman First-Half Profit Falls on Consumer Slowdown

Harvey Norman Holdings Ltd. (HVN), Australia’s largest electrical-goods retailer, said first-half earnings fell 2.1 percent as stalling consumer spending cut sales and crimped fees from franchisees.

Net income dropped to A$128.9 million ($139 million) in the six months ended Dec. 31, from A$131.7 million a year earlier, the Sydney-based company said in a statement today.

Harvey Norman shares fell the most in two weeks after cash flow from operations plunged 79 percent amid a slide in revenue and increased loans to help stores buy inventory for the Christmas period. Earnings from franchising operations dropped by 37 percent in the first half, it said.

“The cash flow was horrendous,” said Sondal Bensan, a Sydney-based analyst at BT Investment Management Ltd. (BTT), which has more than $40 billion under management.

Harvey Norman shares fell 4.2 percent to A$2.07 at the close of trading in Sydney, the biggest decline since Feb. 14. Australia’s S&P/ASX 200 Index gained 0.8 percent.

Australian consumer confidence fell in the second half of 2011 to levels last seen in the aftermath of the 2008 financial crisis, hurting the profitability of chains selling costlier items such as electrical goods and furniture.

Falling Prices

A decline in prices for electronics including televisions and computers cut Harvey Norman’s retail sales by 6.1 percent in the period, with revenue from stores open at least a year falling 6.3 percent.

“The underlying performance of the business doesn’t look great,” David Thomas, an analyst at CLSA Asia-Pacific Markets in Sydney with a “sell” rating on the stock, said by telephone.

The audio-visual and information-technology markets will continue to be challenged in the next six months, Harvey Norman said in its statement.

The company expects growth in home appliances, while online sales, introduced in Australia and New Zealand in during 2011, will provide incremental revenue, Harvey Norman said, without specifying a timeframe.

Pretax earnings from franchises declined to A$95.5 million in the six months ended Dec. 31, from A$150.4 million a year earlier. The margin narrowed 1.78 percentage points to 3.7 percent, worse than the 3.9 percent predicted by Craig Woolford, an analyst at Citigroup Inc. in Sydney.

Property earnings gained 46 percent to A$68.8 million. The unit, which gets income from developing and renting outlets to franchisees, accounted for 42 percent of Harvey Norman’s pretax profit.

JB Hi-Fi Ltd. (JBH), the nation’s second-largest electronics chain, reported a 9.4 percent drop in first-half profit on Feb. 13. The six months ended Dec. 31 had been “the most challenging period for retailers in many years,” it said.

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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