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Published 05 March 2013 08:04, Updated 06 March 2013 09:53
The $63.8 million that Gerry Harvey’s Harvey Norman gave franchisees in the form of ‘tactical support’ during the first half is a cause for concern. Photo: Fairfax Media
Shares in Harvey Norman are about 12 per cent higher since the company handed down its first half net profit last week.
While the result was actually worse than expected – earnings fell an ugly 36.5 per cent to $81.9 million, well short of market expectations of a $108 million profit – investors have chosen to focus on the glimmers of hope contained in the big retailer’s January sales report.
And fair enough too. After moaning about the state of the retail market for so long, the results gave Gerry Harvey something to hold on to.
In Australia, total sales lifted 4.1 per cent in January with like-for-like sales (the key measure for analysts) rising an impressive 5.8 per cent. Across Harvey Norman’s global business (which extends as far as Slovenia, Croatia, Ireland and Northern Ireland) like-for-like sales were up 5.4 per cent.
The hope among investors is that Harvey Norman and the other big retailers have hit the bottom. Things might not get better in a roaring hurry, but at least they might not get worse.
But it would be wrong to say that the pressure on Harvey Norman’s business model is easing.
The order of the presentation that Harvey Norman released to accompany its results highlights the story that Gerry Harvey wants you to see.
The first slide is about omni-channel retailing and describes Harvey Norman’s continued push into the brave new world of online and mobile selling.
The second slide is about the improving sales picture.
The next key point is about the strength of Harvey Norman’s property portfolio. “As at balance date, we have a total asset base of $4.27 billion which is inclusive of a property portfolio valued at $2.14 billion. Our strong balance sheet affords access to capital and seize opportunities in the marketplace [sic].”
It’s not a bad picture is it? Harvey Norman now ‘gets’ online retailing, its sales are rising and it’s still got this whopping great property portfolio underpinning the whole enterprise.
But the crack in the picture can be found if you go a little deeper into the profit presentation – down to slide 10 – and see the first mention of word “support”.
Like most franchisors (remember, all departments of a Harvey Norman store are actually little franchises) Harvey Norman provides tactical support to try and stimulate sales for its franchisees – advertising campaigns, incentives, support for discounts.
The Harvey Norman presentation shows support for franchises increased more than 40 per cent or $18.5 million to $63.8 million, which means the company is on track to break 2011-12’s record for tactical franchisee support of $124 million, which was double the previous year.
As consumer spending improves, tactical support for franchisees should fall. But the sharp increase in the amount spent in the first half should give investors some pause as it underlines the fact that Harvey Norman’s franchisees are under severe pressure.
And if they are under pressure, then Harvey Norman’s revenue and the value of its much vaunted property portfolio could fall.
The amount spent on tactical support for franchisees is a crucial figure to watch. While it remains high investors should remain cautious.